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When Should You Lock in a Mortgage Interest Rate?

On a $400,000 mortgage, the difference between a 4% and a 5% interest rate comes out to almost $240 per month. That’s over $2,800 per year. 

You could do a lot with that kind of money. And claiming it could be as simple as locking your mortgage rate as soon as you’re ready to make an offer on your house.

Lock too early, though, and you could lose your choice rate — and the savings that come with. So it pays to understand both how closing timelines and mortgage rate locks work. 

What Is a Mortgage Rate Lock?

Mortgage interest rates can bounce around like a pinball. But mortgage loans usually take a month or so to close, so how do you know at the start of the process what your final mortgage rate will be by your closing date?

Enter: the mortgage rate lock. 

When you apply for a mortgage, you first submit a mortgage application form — called a 1003 form — along with mountains of paperwork documenting your income, assets, liabilities, and firstborn child. The lender reviews your loan application, and (hopefully) preapproves you for a mortgage. 

But that doesn’t mean you’re ready to move forward. If you’re buying a new house or investment property, you need to submit the mortgage preapproval letter with your purchase offers, after all. 

Once you sign a real estate sales contract however, the clock starts ticking. The “time is of the essence” clause isn’t just flowery legalese — it means you need to close by a certain date, or the contract (and your earnest money deposit) become forfeit.

At this point, you call up your loan officer and tell them you’re ready to roll. They can then lock in that moment’s mortgage rate for you, guaranteeing that you get that interest rate if you settle within a certain timeframe. You must do the same if you’re refinancing your current mortgage, though in that case there may be less urgency to close within a specific timeframe.

Rate locks apply to both fixed-interest and adjustable-rate mortgages (ARMs). With the latter, they determine your initial introductory rate.

How a Mortgage Rate Lock Works

No matter how much higher interest rates climb between that moment and when you settle, you still get the interest rate from the moment the loan officer locked it. 

Of course, the reverse is also true. If interest rates fall, you still pay the higher interest rate from the date you locked in your rate. 

Unless you buy a float-down option, that is.

What Is a Float-Down Option?

To hedge against the risk that interest rates fall after you lock in your rate, you can pay your lender for a “float-down option.” If interest rates drop after you locked your rate, this lets you close your loan with the subsequent lower rate. 

But float-down options come at a cost. That cost could come in the form of an up-front fee or higher lender fees at settlement. If the option doesn’t kick in, you could be saddled with a higher interest rate.

Before you can take advantage of a float-down option, interest rates must fall by a certain minimum amount. For example, the lender might set the minimum drop distance at 25 basis points,or 0.25%. If rates only drop by 0.2%, you can’t call in the float-down option. 

Which raises another point: You’re responsible for redeeming your own float-down option. Your lender won’t volunteer the information. You have to keep an eye on interest rates yourself and specifically ask your lender to redeem your option if rates fall. You can only redeem the option once, and after that your rate locks normally.

So make sure you understand the specific rules and costs for your lender’s float-down option before opting for it.

Mortgage Rate Lock Fees

The longer your rate lock, the more likely it is to come with fees. 

For example, your lender may offer a 30-day lock for free, but if you want a 60-day lock, the lender might charge an extra fee that’s expressed as a fraction or multiple of a mortgage point. A mortgage point is 1% of the total loan value — for example, $4,000 on a $400,000 loan. Your lender might cut you a break and charge a fraction of a point rather than a full point, however. 

If you fail to settle within your rate lock period, you can opt to extend your lock, but often at a comparable fee. If mortgage rates have since dropped, you may be in luck, but don’t count on that happening. 

When Should You Lock in a Mortgage Interest Rate?

As soon as you’re ready to proceed with your loan, you should lock in your interest rate. 

You could gamble on interest rates falling and delay locking in a rate, but it means exactly that: gambling. Unless you have a crystal ball lying around, just lock in your rate when you know you’re ready to proceed.

If you’re applying for a purchase loan, lock your rate once you sign the purchase agreement with the seller. If you’re refinancing, you don’t have the same time crunch because there’s no seller involved. Simply decide when you want to settle and work backward from there. 

Just remember that you have to settle within the lock period or you could end up paying a higher interest rate. It usually takes 30 to 60 daysfor mortgage loans to settle. Make sure your loan officer and underwriting team are working toward an on-time close.

How to Lock in a Mortgage Rate

Your mortgage broker or lender locks the rate on your behalf, so you don’t have to “do” anything but ask for it. In most cases, your loan officer will ask you whether you’re ready to lock in a rate when you tell them you’re ready to move forward.

Use the opportunity before locking in a rate to negotiate a lower interest rate, after comparison shopping. You can also negotiate a lower interest rate in exchange for higher lender fees. These are called “discount points” in the industry.

Confirm the length of the lock with your loan officer, and try to get a commitment in writing that they can close within that time period. This commitment won’t be legally binding, but it gives you that much more leverage if they fall behind schedule at your expense. 

Mortgage Rate Lock FAQs

While interest rate locks are pretty simple, first-time homeowners usually have plenty of questions about them. Keep the following in mind as you apply for a mortgage.

Should I Lock in My Mortgage Rate Today?

It depends. Did you sign a real estate sales contract today? If so, then yes. 

Likewise, if you’re looking to refinance your mortgage as soon as possible, then yes, lock in a rate once you choose a lender and get approved. You could wait and hold out for lower interest rates, but that could just as easily backfire on you. 

How Long Can You Lock in a Mortgage Rate?

You can typically lock in a mortgage rate for 15 to 60 days. That includes both conforming and non-conforming loans

The length of your lock period depends on the lender’s policies and market conditions. Lock periods may shorten when mortgage rates are rising and lengthen when they’re falling. 

Shorter lock periods — 15 to 30 days — often cost nothing. Longer lock periods often come with additional fees.

What Happens if My Rate Lock Expires Before Closing?

In most cases, you can ask your lender for a rate lock extension. But if you do, they may charge you for the privilege, even if they’re to blame for the delay. 

If you don’t extend the locked rate, you fall at the mercy of the current mortgage rates at the time the lock expires. In other words, your loan rate begins to float with the market once more. In a rising interest rate environment, this means you’ll have a higher monthly loan payment.

What Happens if Rates Fall After I Lock in a Rate?

If you opt for a float-down option and it triggers, your interest rate will drop according to the terms of that option. 

Likewise, if your lock period expires before the loan closes and rates have fallen, you may end up with a lower interest rate when the loan does close — and a lower monthly payment. 

Otherwise, you close on your loan at whatever rate you locked in, regardless of the market interest rate at the time your loan closes. 

Can I Back Out of a Mortgage Rate Lock?

Technically, yes. You can back out of a rate lock. But it comes with consequences. 

You’d need to cancel your entire mortgage application. The lender would effectively throw out your file, and you’d have to reapply for an entirely new loan. That could even mean paying for a whole new home appraisal.

This restarts the lengthy loan process, further pushing back your settlement date. If you’ve made an offer on a house, you’ll likely default on your sale contract and could lose the house to another buyer, putting your home search back at square one.

Final Word

While you have many options for types of mortgages, rate locks exist in nearly every one. 

Word to the wise: Don’t play interest rate roulette. Just lock in a home loan rate when you’re ready to move forward with a mortgage, and if you absolutely must, opt in for a float-down option. But just as you shouldn’t try to time the market in your investments, you shouldn’t try to time interest rates either. 

As a final thought, one surefire way to lower your interest rate is to improve your credit score. Market interest rates rise and fall, but lenders always charge a lower premium over benchmark rates for borrowers with strong credit. Not only does it lower your monthly payment, but it can also lower your down payment to boot. 

G. Brian Davis is a real estate investor, personal finance writer, and travel addict mildly obsessed with FIRE. He spends nine months of the year in Abu Dhabi, and splits the rest of the year between his hometown of Baltimore and traveling the world.