Mortgage Rate Lock: How to Protect Your Interest Rate
Once you’ve shopped around and found the best interest rate for your home loan, there’s one more important step to take — getting a mortgage rate lock. Your mortgage rate isn’t guaranteed until it’s locked, and the wrong decision could leave you with a higher monthly payment when you buy a home — or less monthly savings if you’re refinancing.
Understanding the how, when and why of mortgage rate locks will give you the security of a rate that won’t fluctuate, which is especially important since mortgage rates change daily.
What is a mortgage rate lock?
A mortgage rate lock is a commitment from a lender to guarantee a mortgage rate for a set period of time. By locking in a mortgage rate, you don’t have to worry about the interest rate changing between your loan application and closing. As long as you close within the lock timeframe and there aren’t any changes to your application, your rate won’t budge.
Without a rate lock, your interest rate could rise during the mortgage process, leaving you with a higher payment. Lenders may lock your interest rate when they issue your loan estimate. If they do, you’ll see the details on page one of your loan estimate, which we’ve highlighted on the example below:
If your lender discovers any changes to your initial application before your closing, your interest rate could change.
THINGS TO KNOW
When a mortgage company locks in a loan they aren’t just making a commitment to you. The interest you pay is potential income to investors that buy and sell mortgages in multi-million dollar bundles of closed home loans called mortgage-backed securities. The investor expects your lender to deliver a closed loan once you lock your rate, and your lender may end up paying penalties if for some reason you cancel your mortgage application.
Why should I lock in my mortgage rate?
The most obvious reason you should lock your rate is so it doesn’t change before your closing. A higher rate means more than just a higher monthly payment and thousands of dollars of extra interest charges over the life of your loan.
A sudden spike in your interest rate during the loan process could flip a loan approval to a loan denial if your debt-to-income (DTI) ratio exceeds lenders standard guidelines. Lenders calculate your DTI ratio by dividing your total monthly expenses (including your mortgage payment) by your before-tax income.
Let’s assume two borrowers making $82,000 per year are approved for a mortgage on March 3, 2022, with a closing date of June 23, 2022. During that time period, one borrower locked his mortgage rate at 3.76% in March, while the other borrower floated his rate until the third week of June when rates had risen to 5.81%.
In this example, both borrowers have a $488 per month car payment and a $300 per month student loans payment (both averages based on recent LendingTree auto loan and Student Loan Hero data), and are buying a $400,000 home with a 20% down payment.
|Date locked||Interest rate locked||PITI^||DTI||Approved or denied based on DTI|
|March 3, 2022||3.76%*||$2,017.12||40.07%||Approved|
|June 23, 2022||5.81%**||$2,412.98||45.7%||Denied|
*Freddie Mac Primary Market Mortgage survey data from March 3, 2022
**Freddie Mac Primary Market Mortgage Market Survey data from June 23, 2022
^ PITI stands for principal, interest, taxes and insurance. All four are included in monthly mortgage payments.
Essentially, the homebuyer that locked in their rate still qualifies because they locked their rate at the beginning of the loan process. The homebuyer that wasn’t locked no longer qualifies for a $400,000 home price because the extra $395.86 in monthly payment puts them over the lender’s 43% DTI ratio maximum.
When can I lock in my mortgage rate?
You can lock your rate once your lender has received your loan application, pulled your credit report and issued a loan estimate. If you’re buying a home, lenders typically can’t lock your loan rate until you have an accepted purchase contract. That’s because a mortgage is tied to real estate, which means the lock has to be tied to the address of the property you’re buying.
Some lenders offer programs that allow you to lock before you’ve found a home, and then transfer the lock to a home once you’re under contract.
When should you lock in your mortgage rate?
You should lock your mortgage rate as soon as possible in the mortgage process, as long as you’ve already shopped quotes from at least three to five lenders. On the other hand, it may be worth it to hold off on a mortgage rate lock depending on whether you’re going to buy or refinance a home.
Tips for a purchase mortgage rate lock
When you buy a home, your closing date is set by the purchase contract. Your rate lock should expire on or after that date to avoid having to pay for a lock extension. It’s best to give yourself a cushion in case the home inspection reveals repairs that need to be completed before your closing.
Locks are typically offered in 15-day increments, and the extra cost of locking your rate for 45 days instead of 30 days may give you the wiggle room if any last-minute delays pop up with your closing date. The longer lock period may also keep you from paying costly extension or relock fees if you go past the deadline for a shorter lock.
There are also scenarios when a mortgage lock may not make sense:
You’re buying a fixer-upper home. While you may get a great deal on the price of a home that needs major repairs, unexpected complications like labor shortages or cost spikes can make timing your closing difficult. With a regular loan, repairs have to be completed before you can complete your closing. It may be worth it to consider a fixer-upper loan like the Fannie Mae Homestyle® or the FHA 203(k) program — you can roll the cost of repairs into one loan and lock your rate in and close before the improvements are completed.
You need funds from the sale of your current home to buy a new home. If you can find a seller that will accept an offer that relies on your current home selling, you may want to hold off on locking your rate. If there are any delays in your sale, you could end up paying costly extension and relock fees. In this situation, a bridge loan may make more sense because it allows you to borrow equity on your current home while it’s for sale and use the money to make a down payment on a new home.
Tips for a refinance mortgage rate lock
If your current rate is high, the faster you can complete a refinance the sooner you’ll start saving money with a lower refinance rate. However, picking the right rate lock period can be tricky for a number of reasons:
Your lender may be inundated with refinance business. Word gets around fast when mortgage rates start dropping. The more business they get, the more difficult it is to control how long it takes to refinance a mortgage. Ask your lender upfront what their turnaround time is, and if they’re willing to pay for lock extensions if they can’t meet your lock expiration date.
Your appraisal could take a long time. If you’re tapping equity with a cash-out refinance
or applying for a renovation loan, you’ll need a home appraisal, which can take weeks if home appraisers are flooded with orders in a low-mortgage rate market. That means you’ll need a longer mortgage rate lock period
There are some streamline loan programs that don’t require an appraisal or proof of income. You may want to discuss a shorter mortgage rate lock period for these refinance types, since there’s very little paperwork for the lender to process:
- FHA streamline refinance loans. If you currently have an FHA loan, this program allows you to save money without the hassle or cost of an appraisal or income documents.
- VA IRRRLs. Military borrowers with a VA loan may be eligible for a VA interest rate reduction refinance loan (IRRRL). Like the FHA streamline, you won’t need an appraisal or any proof of income.
- PIW mortgages. PIW is short for property inspection waiver, and if you have at least 10% equity in your home, conventional lenders may approve your loan without requiring an appraisal. However, you’ll still need standard income documents to verify your income.
How long can you lock in a mortgage rate?
Most lenders offer rate locks for 30, 45 or 60 days, according to the Consumer Financial Protection Bureau. However, you may find some lender with shorter term locks (as low as 15 days for purchase loans) or as long as 90 or 120 days if you’re willing to pay an upfront fee.
Lenders may also offer a lock option while you’re shopping for a home. These programs give you the security of a locked in rate while you’re house hunting. Once you find the home, the property address is added to the lock and you don’t have to worry about whether rates pushed your payment out of reach for your budget.
THINGS TO KNOW
Mortgage rate locks for construction loans can be as long as one year, depending on the lender. If you’re building your home at a time when interest rates are headed up, a construction mortgage rate lock could keep your payment from ballooning to a point where you can’t afford it after your home is finished.
How to lock in your mortgage rate
The steps to locking in your mortgage rate are very simple:
- Ask your lender to lock your rate. You can’t actually lock your rate in — your lender must lock the rate on your behalf.
- Review the locked-in loan estimate. You’ll receive an updated loan estimate within three business days of your mortgage rate lock. Make sure the rate is correct, and check to make sure the closing costs associated with the rate haven’t changed.
- Note the lock expiration date. Your mortgage rate is only guaranteed if you close by the expiration date.
Why your interest rate could change after a mortgage rate lock
Any discrepancies between your loan application and the information vetted by your lender can result in a change to your locked rate. The following are the most common reasons a locked rate could change:
- Your credit score rises or falls. If your lender has to pull a new credit report before you close, a late payment or higher credit card balances could push your locked-in rate higher.
- You switch to a different loan program. Interest rates are tied to the loan type you choose. For example, if you apply for an FHA loan and switch to a conventional loan, the rate would have to be relocked based on conventional interest rates.
- Your home’s value comes in higher or lower than expected. If you’re buying or refinancing a home, a lower-than-expected appraised value could trigger a change to your interest rate. A higher appraisal may help you snag better refinance rates, but it won’t help on a purchase loan since your rate is based on the lesser of the purchase price or appraised value.
THINGS TO KNOW
Your credit score has the most impact on the credit score your lender offers. Although the credit score needed to buy a house may be as low as 500 for an FHA loan, lenders typically offer the best rates for borrowers with scores above 740. If you’re not in a rush to buy or sell, it’s best to check your credit a few months before you apply for a mortgage to see if you can boost it. Here’s a few credit score tips that could help you snag a lower locked-in rate:
- Pay off your credit card balances. Maxed out credit cards are a drag on credit scores. If you pay your balances off, expect it to take a few months for the lower balances to show up in your scores.
- Ask your loan officer about credit rescoring. Some lenders offer “rapid rescoring” options that speed up the improvement in your scores after you pay off debt. It’s not free, so make sure you discuss the costs before you try this option.
- Avoid opening new credit accounts. Each time you apply for credit, whether it’s a credit card, car loan or personal loan, your credit score drops slightly. If you recently applied for several new accounts, you may want to wait three to six months to apply for a mortgage.
What is the cost to lock in a mortgage rate?
Lenders don’t typically charge a rate lock fee if your lock is for 60 days or less. Longer term locks may require an upfront fee that can be applied toward your closing costs. As mentioned above, construction lenders may charge a fee to offer long-term locks while your home is being built.
If you miss your lock expiration date, you could be on the hook for a rate lock extension fee. Discuss your rate lock period and ask your loan officer about their rate lock extension and relock cost policies.
What is a mortgage rate lock float down?
A mortgage rate float down is a special program some lenders have in place to allow you to take advantage of falling interest rates, even if your rate is already locked. You’ll typically need to meet the following criteria in order to be eligible:
- Your loan must be conditionally approved. Lender float-down policies usually only apply if your loan has been approved based on a review of your credit, income and assets.
- Your rate must drop by a certain amount. In most cases you can’t float down your rate unless it drops a quarter- to half-percentage point.
- You’ll need to pay a fee. Because the lender has to renegotiate your lock with the investor you already committed to, you’re usually charged a fee of up to 0.50% of your loan amount.
Frequently asked questions
Yes, but some lenders may set their own rules about when you can lock your rate. If you’re taking out a jumbo loan, renovation loan or a non-qualified mortgage, ask your lender when you can get a mortgage rate lock.
You’ll have to pay a relock fee or a lock extension fee. Typically the longer you need to extend, the more it will cost. If you have to relock, your new rate will be based on current rates or your original lock, whichever is higher.
Check with your lender about a float-down rate lock option if you notice rates are falling after you lock.
In most cases, no. However, some lenders offer programs that allow you to lock for a set number of days while you’re house hunting.
You can, but it’s not a good idea. For example, you could lock in your rate with two different mortgage brokers who do business with the same lender, and get a phone call that you’ll have to cancel one or the other. Plus each lender is required to pull their own credit report, which could ding your credit scores.
Interest rates are like stocks. They can fluctuate based on market conditions that change daily, and sometimes even hourly.
Yes. If you decide you don’t want to proceed with that lender, you’ll need to restart the mortgage process.