Mortgage Rate Lock: How and When to Lock in Your Mortgage Rate

What is a mortgage rate lock?

A mortgage rate lock is when your lender guarantees to set your loan at a specific fixed rate, even if market interest rates change before your loan closes. Locking in your rate before closing protects you from rising mortgage rates during the mortgage rate lock period.

You can lower your rate once during the rate lock period as long as you’ve purchased a float-down option.

Mortgage rate locks can save you money because if your interest rate increases, so do your monthly payment and total borrowing costs.

While a mortgage rate lock protects you from rising interest rates, you won’t benefit from lower rates unless you purchase a rate float-down option. Floating your rate means you wait to lock in your mortgage rate until market conditions change or shortly before your scheduled closing.

Float-down options typically allow you to lower your rate once during the mortgage rate lock period. This can be helpful if you think rates might decrease before you close and you want the opportunity to lower your overall borrowing costs and monthly payment.

“It might be a good idea [to float your rate] if you expect rates to go down due to market dynamics,” said Josip Rupena, founder and CEO of Milo, a fintech direct mortgage lender.

How long does a mortgage rate lock last?

Ultimately, how long a mortgage rate lock lasts depends on the type of loan you’re getting, the lender you choose, the terms of your loan and when you need to close.

A rate lock typically lasts 15 to 60 days, though it can last longer.

For a traditional mortgage, you can generally lock in your rate for 15 to 60 days or more. If you’re getting a construction loan to build a home, you may be able to lock in your rate for as long as a year. When selecting the lock’s duration, consider how long it will take to close and add a little cushion to the lock period.

If your loan doesn’t close before the lock period expires, your mortgage rate will reset to current market rates, and you’ll need to relock it.

When can you lock in your mortgage rate?

You can lock in your mortgage rate as early as when your loan is approved and as late as a few days before your scheduled closing.

If you’re getting a mortgage to build a home, you’ll usually pay a variable rate during construction, which converts to a fixed rate when construction is complete. If you’re worried about interest rates rising during the construction period, you may be able to lock in your rate while your home is being constructed, even if it takes months to build.

Locking in your rate is a way to protect yourself against changes in market conditions.

“It’s best to lock in your rate when mortgage rates are lowest as possible,” Josip Rupena said. “Otherwise, the sooner, the better is generally the best option as rates tend to fluctuate — and it’s usually hard to predict these fluctuations.”

Besides considering market conditions, the timing of when you can lock in your mortgage rate also depends on your specific situation.

“It is best to lock in your rate when you cannot or do not want to experience market pricing deterioration that may affect the pricing you have in place for your home loan,” said Brad Cahoone, broker and CEO of Global Home Finance, a brokerage. “If you’re building, for example, you need to consider a lender that offers rate locks long enough for the construction of your home to be completed and avoid rate increases eight to 12 months out.”

You’ll also want to consider if the rate lock’s length is right for your needs. If you don’t anticipate closing the loan before the lock expires, your rate will reset to the current market rate.

How to lock in your mortgage rate

Before you can lock in your mortgage rate, you need to research mortgage options, apply for a mortgage and get approved. Once you’re approved, you can lock in your rate. Take the following steps to lock in your mortgage rate:

1. Research mortgage solutions

Consider the type of mortgage you want to get and the mortgage lender you want to use. Weigh factors such as:

• Whether the mortgage lender offers the type of loan you want
• The application process
• What it takes to qualify
• How much you’ll pay
• The funding speed

» MORE: How to choose a mortgage lender

2. Apply for a mortgage

After you’ve selected a mortgage lender, it’s time to apply. To expedite the application process, have your personal information and income documentation ready, as you’ll need to provide this information to your lender.

3. Get approved

Once you’ve applied for the mortgage, provide your lender all requested documentation, like tax returns, pay stubs and bank statements, as soon as possible. The quicker you respond to your lender’s requests, the quicker you’ll be able to get approved for a mortgage.

4. Lock in your rate

After your mortgage is approved, you’ll be able to lock in your interest rate. Most mortgage lenders allow you to do this through the online portal you use to submit documentation and track the status of your mortgage application.

Pros and cons of locking your mortgage rate

Locking your mortgage rate can be a wise move to make if you’re concerned that market rates may increase before you close on your home purchase. However, it’s important to be aware of the drawbacks as well as the advantages of taking this step.

Situations that can void your mortgage rate lock

Some of the situations that can void your rate lock include:

• Changing terms or loan type: Changing the terms or type of loan you’re getting can void your mortgage rate lock, as lenders use these factors to set the rate.
• Changing lenders: Your rate lock will be voided if you switch to a different lender.
• Changes to your financial situation: If your financial situation changes, your lender may void your rate lock. This may happen if your income or credit score drops, or if your debt-to-income (DTI) ratio increases. In these cases, you may no longer qualify for the rate you were offered.

If you don’t want to lose out on a rate after it’s locked in, don’t make changes to the loan, and do your part to close on time.

Why mortgage rates change

Mortgage rates change with increases or decreases in mortgage demand and borrowing costs. Decreased mortgage rates tend to encourage spending and carry lower borrowing costs. Increased mortgage rates cost more and tend to slow spending. The following are some primary factors that cause mortgage rates to change.

Economic conditions

Mortgage rates tend to fluctuate as economic conditions change. Rates are generally lower when market forces want to encourage continued or increased spending by consumers and businesses. Conversely, rates are generally higher when market forces want to slow down consumer or business spending.

Federal funds rate

The Federal Reserve (the Fed), the central bank of the United States, aims to ensure maximum employment and a low or stable level of inflation. A key way the Fed adjusts its monetary policy to achieve these goals is by increasing or decreasing the federal funds rate, which determines how much it costs for banks to borrow money. Banks pass any borrowing cost changes on to borrowers in the form of increased or decreased interest rates.

Mortgage-backed securities

Many lenders bundle the mortgages they originate and sell them to investors as mortgage-backed securities (MBS). The money investors earn on an MBS investment is directly tied to the bundled mortgages’ interest rates. Before buying an MBS, investors seek to ensure the return is big enough for the risk they’re taking on the investment. Lenders change the mortgage rates they charge to accommodate the returns investors are willing to accept.

Mortgage demand

The three factors above all influence mortgage supply and demand. Interest rates change to help keep market supply and demand in equilibrium.

» MORE: How are mortgage rates determined?

FAQ

Bottom line

Locking your rate before you close provides protection against rising interest rates. In an environment where rates are rising or unpredictable, you’ll want to lock your rate because even the slightest change could cost you thousands of dollars in interest over the life of your loan. If you think rates might decrease before you close, you may want to purchase a float-down option so you don’t lose out on potential savings.

Ultimately, the best time to lock in your rate largely depends on market conditions and your situation. Pay attention to what’s happening in the market so you’re better equipped to decide when to lock in your rate.