A mortgage rate lock allows you to keep your interest rate unchanged for a set period of time, usually between when your purchase offer is accepted and when you close on your new home. Locking in your rate can help you better plan for future mortgage costs, as rates can fluctuate — for better or worse — throughout the closing process.
It’s difficult to predict mortgage rate trends, and no speculator can tell you exactly which direction rates are headed over the next week or month. A rate lock can mitigate the risk that rates rise unexpectedly, but it can also leave you stuck with a higher rate if market conditions change. By asking the right questions, you can decide if or when a rate lock is the right move.
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Should You Lock In a Mortgage Rate Now?
In the current rate environment, you may be wondering whether to lock or float your rate. Locking in a mortgage rate protects you against rate hikes that lead to higher monthly payments and long-term costs, especially during times of volatility. During the first half of 2022, average mortgage rates for a fixed 30-year loan rose from around 3% at the start of the year to past 5% in recent months.
At the same time, a rate lock may keep you from getting a lower interest rate if rates fall while you close on your loan, although it’s not likely that rates will drop significantly anytime soon. The Mortgage Bankers Association forecasts that 30-year fixed rates will remain above 5% for most of the rest of the year.
Even if you’re shopping for a home and you’re happy with current mortgage rates, you may not be able to lock in a rate quite yet. Lenders typically require you to have a signed purchase agreement with the seller in order to lock in your mortgage rate, says Sean Grzebin, head of consumer originations at Chase Home Lending.
“If you find a house you love and you are comfortable with the payment on the home based on today’s rates, we suggest locking that rate so you have certainty of what your payments will look like on your home loan,” says Grzebin.
Here are a few things you should discuss with your lender when determining if you should lock in a rate today.
Is a Mortgage Rate Lock Free?
Some mortgage lenders offer short-term rate locks at no charge, which means you can avoid paying for a rate lock as long as you close within this period. But they may not be free, technically, since an initial rate lock period is typically priced in to your interest rate and loan fees. Locking in your rate for a longer period — or extending your current rate lock period — usually comes at a cost. The fee for an extended rate lock is a set percentage of the total loan amount, such as 0.25%.
How Long Does a Rate Lock Last?
Rate lock periods usually last between 15 and 60 days, with longer-term rate locks being more expensive. Select mortgage lenders may offer a rate lock extension, but you’ll likely have to pay an additional fee to lock in your rate for a longer period. Some lenders may also extend your rate lock for one or two extra days at no charge around your closing date.
What Happens If Your Rate Lock Expires Before You Close?
If your closing is delayed past your rate lock period, you may either have to request a rate lock extension or your rate will reset to the current prevailing rate. About a fifth of closings experience delays, according to the National Association of Realtors. Depending on why your closing is pushed back, the lender may waive the extension fee.
What Happens If You Don’t Lock In a Rate?
Your lender may give you the option to bypass a rate lock, or “float” your rate. If mortgage interest rates have been trending down for the past several weeks and you expect them to drop further, you may decide to wait and lock in your rate later. But since no lender or borrower can accurately predict mortgage rate trends, you risk getting stuck with a higher rate.
Is There a Rate Float-Down Option?
Some — but not all — mortgage lenders offer a float-down provision, allowing you to take advantage of lower rates if they fall during the rate lock period. Lenders charge a fee for this service, and there’s no guarantee that rates will improve over time. Float-down options may only go into effect if rates fall significantly during your rate lock period, depending on the lender.
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Pros and Cons of Locking Your Mortgage Rate
— Reduced risk. The primary benefit of locking in a mortgage rate is that you’re protected from interest rate hikes. If rates rise during the closing process, your locked-in mortgage rate will stay the same.
— Low initial cost. Most mortgage lenders will let you lock in your rate for a 30-day period at no additional cost. This essentially allows you to lock in a mortgage rate without paying extra money upfront, as long as you can close on the home within this time.
— Less flexibility. If mortgage rates fall after you’ve locked in a rate, you may be stuck with a higher rate than what’s currently available. The exception is if you have a float-down option, but this feature comes at an extra cost.
— Rate lock fees. Lenders usually charge an upfront fee if you want to lock in a rate for a longer period, such as 75 or 90 days. You might also have to pay a fee if you want to extend the rate lock period, such as when closing is delayed.
What Happens If Rates Drop After You Lock?
Let’s say you locked in a 30-year fixed mortgage rate at 5.25% — but over the course of closing, the mortgage rates fell significantly to 5.05%. If this happens, you have a few options:
Discuss your options with your mortgage lender. A rate lock freezes the interest rates on all available mortgage products for the day you locked in. You may be able to pay more discount points or switch to a shorter loan term (such as a 15-year mortgage instead of a 30-year mortgage) to lower your interest rate. However, these rates will still be based on the day your lock period began.
“Some lenders may allow customers to move to a lower rate if they did not select a float-down option,” says Grzebin. “Customers can ask their lender if they offer options to do this and if there are any fees associated with moving to a lower rate.”
Start over with a new lender to lock in a lower rate. You’d lose any appraisal fees you already paid to the first lender, and switching mortgage lenders would likely delay closing. Pushing back your closing date may mean losing out on your home (and your earnest money) if the seller has a strict deadline. Communicate with your real estate agent before making a decision that would nullify your purchase agreement.
Let your rate lock expire. If the seller is willing to delay closing until after your rate lock expires, you may be able to take advantage of lower rates. At this point, your lender would base your new rate on the current prevailing rate. However, there’s still risk that rates will rise again or that the seller refuses to extend the closing date. And some lenders may not let you relock at a lower rate anyway, Grzebin says.
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