How to use a mortgage rate lock to secure a low interest rate

Mortgage rates can change from day to day, depending on factors like the economy, inflation, and the job market. A 30-year fixed-rate mortgage may look like a great deal on a Monday, only to move higher or lower on Tuesday.

A mortgage rate lock can be a way to get ahead of those fluctuations because it guarantees your lender won’t change the rate it’s promised you, no matter how interest rates change between the time you lock in the rate and close on the loan.

• What is a mortgage rate lock?
• How does a mortgage rate lock work?
• How can I lock in a mortgage rate?
• Pros and cons of locking in a mortgage rate
• When should I lock in a mortgage rate?
• Why mortgage rates change
• 5 tips for finding the best mortgage rate

What is a mortgage rate lock?

"Locking in" your mortgage rate means a mortgage lender commits to a specific interest rate when you perform a lock, and that’s the rate you’ll receive at closing. It’s a guarantee between the lender and the homebuyer that the original rate won’t change even if market interest rates do — which they often can.

Between house-hunting, rate shopping, and closing day, a real estate transaction is often a months-long endeavor. Locking in the rate protects buyers in the event rates increase during the process.

And it doesn’t matter what you’re shopping for — you can lock any mortgage rate, whether it’s for a purchase or a refinance.

How does a mortgage rate lock work?

You can lock in a mortgage rate at almost any time during the mortgage process — typically between the time you choose a lender and mortgage right up to a week or so before closing. This is why deciding when to lock the rate can be tricky. You want to lock it when the rate is at the lowest that’s available to you.

Most lenders provide a letter stating the rate lock agreement. This letter states what the interest rate is and how long the rate lock lasts. Lenders can extend a rate lock, or provide a lengthier one at the start, but these options may cost money, so be sure to run through all the considerations of your personal situation before making a decision and completing the loan application process.

Here’s an example of why a rate lock is important: Let’s say you receive an initial rate quote of 3.25% for a $400,000 home loan with a 30-year repayment term, but you don’t lock in the rate. Thirty days later, you’re ready to buy a home, but the interest rate went up to 3.45%. At the higher rate, you’ll pay $44 more per month and nearly $16,000 more in interest over the life of the loan.

How long does a mortgage rate lock last?

Mortgage rate locks vary by lender and the type of loan, but rate locks typically last anywhere from 30 to 60 days, which is usually how long the mortgage application and underwriting process lasts. The rate lock period can be longer, though.

Should your rate lock letter expire prior to closing, you can either ask for a rate lock extension or, if this is unavailable, you’ll need to seek approval for a new interest rate. Keep in mind that extending a rate lock can be expensive.

How much does it cost to lock in a mortgage rate?

Most often, a short-term rate lock costs borrowers nothing. If a lender does charge a rate lock fee, it’s usually between .25% and .5% of the total loan amount. But you’ll likely only see this if you have a rate lock longer than 60 days. Be sure to ask if the fee is refundable or non-refundable.

You can compare mortgage rates and close online when you work with Credible.

How can I lock in a mortgage rate?

The ability to rate lock varies from lender to lender, but most will typically offer a rate lock letter automatically after you apply for a mortgage. If your lender doesn’t automatically offer one, you can simply ask for it.

When you ask, be sure to include questions like:

• How long does the rate lock last?
• Can I have a longer lock?
• What are the associated fees with the rate lock?
• When does the lock expire?
• Are there any penalties if I need to extend my loan closing?

Pros and cons of locking in a mortgage rate

Locking in a mortgage interest rate can be a savvy financial move, but it can also come with some disadvantages.

Pros

• Guards against interest rate increases — Locking in your rate means if rates go up before closing, you’ll keep the lower rate.
• House shop with certainty — By locking in your mortgage rate, you can shop knowing exactly how much house you can afford, the interest rate you’ll pay, and your maximum monthly payment.

Cons

• The clock is ticking — Locking a rate means the pressure is on to close on your new home before the lock expires.
• Miss out on rate drops — If rates decrease, locking your rate means you may miss out on the savings from a lower rate.

When should I lock in a mortgage rate?

Locking in your mortgage rate is good during fluctuating interest rate environments because it provides peace of mind, keeps your interest rate low, and protects against any rate increases. This means you can shop for a home (or a refinance) and be certain that your borrowing power won’t change when the market does.

If you’re already shopping for homes and certain you’ll be making a move in the next 30 to 60 days, locking in the rate is a good idea to ensure the one you’ve qualified for stays put.

If you’re home-shopping when interest rates are falling week-to-week or month-to-month, it may be worth it to continue to float the rate instead of locking it in and making the decision closer to your closing date.

You can also consider floating your mortgage rate if you’re flexible on your move-in date, or haven’t found your ideal home and don’t have any prospects.

No matter the mortgage rate option you choose, you must lock in a rate prior to closing. This helps underwriters run the numbers on the loan and then accurately prepare your closing documents.

Can I cancel a mortgage rate lock if rates go down?

Yes, you can cancel a mortgage rate lock if the interest rate drops and the savings are substantial enough to rethink the transaction. Rather than canceling the deal completely, however, you do have a couple other options:

• Check the paperwork to see if the lender offers a float-down option. Many lenders will offer the one-time ability to lock in a lower rate.
• Ask the lender to negotiate the rate. If a "float down" is unavailable, it never hurts to ask the lender for a lower interest rate. They may be unwilling, but if rates continue to fall they may make a concession rather than lose your business.

Why mortgage rates change

Many factors influence interest rates, including the state of the economy, employment numbers, global market fluctuations, and more. Typically, the more money consumers are borrowing, the healthier the economy. This is why the Federal Reserve can increase or decrease the base interest rate (how much it costs banks to borrow money from the government) in order to speed up a lagging economy or capitalize on a strong economic outlook.

Interest rate changes aren't the only factor that can change the rate you qualify for from a lender. Any changes to your credit score can substantially impact your rate, too. When you first apply for a loan, you’ll be given an interest rate based, in part, on your credit score. Those with the healthiest credit receive the lowest interest rates because lenders perceive these borrowers as having the lowest risk of default.

5 tips for finding the best mortgage rate

Whether you lock your mortgage rate or decide to float is up to your level of risk tolerance and your homebuying/refinance timeline. And while the "lock versus float'' decision is an important one, there are other ways to get the best interest rates possible.

1. Always rate shop between multiple lenders. Not all lenders offer the same rates, which is why it’s important to get a rate quote from at least three lenders to see who offers the best one.

2. Capitalize on existing financial relationships. Your primary financial institution (where you keep your checking and savings accounts) may offer a better rate because of your existing relationship. This isn’t always the case, but it’s worth checking if your bank offers any loyalty rate discounts or fee rebates to existing customers.

3. Work to increase your credit score. If you have a less-than-stellar credit score and would like to receive a better rate, floating the rate and then locking it in when your credit has improved could be an additional way to snag more savings.

4. Make a large down payment. The loan amount and how much money you’ll put down on the home can also affect the interest rate on the mortgage loan. The more money you put down, the less risk to the lender, and the better rate you’re likely to receive.

5. Compare closing costs and fees between lenders, too. While interest rates are important, they’re not the only thing that influences how much you’ll pay to finance a home purchase. Closing costs and loan fees are also things to consider when evaluating rates between lenders.

Even though the current interest rate environment has been falling for years, consumers can’t truly predict or time the market. The next few years may see rising interest rates as a correction from the global COVID-19 pandemic. It’s typically riskier to float a mortgage rate rather than lock it in, even if it means missing out on savings. But ultimately, you should make the decision to rate lock only if you’re happy with the rate, are actively home shopping, and if it makes financial sense for where you are in the homebuying process.