Mortgage Rate Locks - Everything You Need to Know

For the past decade, home mortgage rates have gravitated near historic lows, with some of the most attractive rates witnessed in the past two years amid the covid pandemic.

However, the mortgage environment is cyclical, and aspiring homebuyers are now experiencing increased volatility in mortgage rates as the result of monetary policy changes from the Federal Reserve. It is an important reminder that mortgage rates can fluctuate quickly, especially in periods of rising interest rates.

That is why home buyers getting ready to apply for a mortgage should monitor mortgage interest rates, understand the constraints of their monthly budget, and learn how mortgage rate locks can remove some of the risk of rate fluctuations.

What is a mortgage rate lock?

A mortgage rate lock is a contractual agreement between a mortgage lender and a borrower for a distinct period of time during which the lender will maintain a specific interest rate available to the borrower.

The benefits of locking in your mortgage rate

The primary benefit of pursuing a mortgage rate lock is certainty. Given that mortgage rates can fluctuate, there is a potential risk in waiting. This is especially true in rising interest rate environments where the risk of a higher mortgage rate could mean a higher monthly payment.

If a borrower is comfortable with the mortgage rate quoted to them and the associated monthly payment amount is within their budget, it is a smart choice to lock in that rate.

What is the cost of a rate lock?

Rate locks are not free. The cost of a mortgage rate lock, sometimes referred to as the rate lock fee, varies from lender to lender. This amount is charged to the borrower by the lender to dissuade a borrower from switching to a different lender in the event the market for mortgage rates decreases prior to closing.

Some lenders will factor it into the mortgage rate quoted, while others may show it as a flat-fee line item or as a percentage of the loan amount. In addition to the initial cost of locking the borrowing rate, if a rate lock expires, lenders may charge an additional fee to extend the rate lock period.

When is the best time to lock in your mortgage rate?

Homebuyers are not required to get a rate lock, but should be aware of when they are able to enter into one. Borrowers are able to lock their mortgage rate as early as when they get pre-approved depending on their lender. Typically, most borrowers choose to lock the moment they submit their loan application, but can elect to lock as late as five days prior to the closing of their real estate transaction.

It is nerve racking trying to time a rate lock. The fear of rising interest rates may encourage some borrowers to lock in their rate as soon as possible. The hope that mortgage rates fall prior to closing may incentivize some borrowers to take unnecessary risk in waiting to lock their rate.

At the end of the day, a good rule of thumb is to lock your rate if you are happy with what that rate means for your monthly payment. Buying a home is a large financial transaction and increased certainty in your financing cost can relieve a lot of stress during the home buying process.

How long can you lock in your mortgage rate?

When locking the interest rate on a mortgage, the rate will be set for a specific period of time. The length of this locked period will vary depending on the lender, mortgage type, borrower’s location, and the loan terms. 

On average, most mortgage lenders will allow a rate lock for between 15 days and 60 days. However, it is important to note that mortgage lenders will require a borrower’s financial situations to remain similar. Any material changes in credit score or debt-to-income ratios could result in the lender having the ability to void the rate lock.

What happens if your rate lock expires?

A common question homebuyers will ask is - what happens if my rate lock expires before my loan closes? 

And the answer is it depends on the lender. In some cases, borrowers will be given the option to pay an additional fee to extend the lock period. However, this may not be an option if mortgage rates have increased significantly.

If an extension of the rate lock period is not available, the borrower will receive the interest rate that’s available when locking it prior to closing. This is a compelling reason why borrowers should move quickly through the underwriting process to avoid the risk that their rate lock expires.

Can you switch lenders after a rate lock?

While a rate lock secures a specific interest rate if you proceed with the loan, it does not lock you into working with that lender. 

For example, if mortgage rates significantly dropped after you locked your rate with Lender A and you wanted to switch to get a better rate from Lender B, that is within your rights as a borrower. However, there are other factors to consider before doing so, with the most important being timing.

If a homebuyer is purchasing with a mortgage, they likely have a financing contingency that is valid for a certain number of days. Switching lenders midway through the underwriting process may sound attractive if you are unhappy with the rate or product, but it can add a tremendous amount of stress and execution risk to complete the underwriting process with a new lender within the financing contingency period. 

Depending on the location where you are buying a home, speak to your real estate agent or real estate attorney about the pros and cons of changing lenders.

Want to learn more about mortgage payments? Explore Prevu's mortgage calculator to estimate payments for different home prices and mortgage products.