When applying for a mortgage, you have some control over the mortgage rate, as lenders will consider your credit score, income, and assets to determine your risk as a borrower. On the other hand, mortgage rates change daily based on external economic factors like investment activity and inflation.
If you’re in the midst of the home-buying process and want to secure your rate, you may be able to do so with a mortgage rate lock.
A small change in rates can lead to thousands in savings or additional costs over the life of a mortgage. Given this volatility, you may be wondering, “Should I lock my mortgage rate today?”
Read on to learn how a mortgage rate lock works and the potential benefits and consequences of using this approach.
What Is a Mortgage Rate Lock?
A mortgage rate lock is an agreement between a borrower and lender to secure an interest rate on a mortgage for a set period of time. Locking in your mortgage rate safeguards you from market fluctuations while the lender underwrites and processes your loan.
Interest rates can rise and fall significantly between mortgage pre-approval and closing on a property.
Remember that in the home-buying process, when you’re pre-approved for a mortgage, you will know exactly how much you most likely can borrow, and then you can shop for a home in that range.
So when can you lock in a mortgage rate? Depending on the lender, you may have the option to lock in the rate any time between pre-approval and when underwriting begins.
Before pre-approval and locking in, it’s recommended to get multiple offers when shopping for a mortgage to find a competitive rate.
How a Mortgage Rate Lock Works
Mortgage rate locks are more complicated than simply securing a set rate in perpetuity. How the rate lock works in practice will vary among lenders, loan terms, different types of mortgages, and geographic locations.
Once you lock a mortgage rate, there are three possible scenarios: Interest rates will increase, decrease, or stay the same. The ideal outcome is securing a lower rate than the prevailing market interest rate at the time of closing.
So how long can you lock in a mortgage rate ahead of closing? When you choose to lock in your rate, it’s stabilized for a set period of time — often 30, 45, or 60 days — though shorter and longer periods may be available based on the lender.
If the rate lock expires before closing on the property, the ability to extend is subject to the lender.
According to the Ellie Mae Origination Insight Report, it took around 50 days on average to close all loan types in 2021, underscoring the importance of timing a mortgage rate lock with your expected closing date. Otherwise, you could face fees for extending the rate lock or have to settle for a new, potentially higher rate.
Whether borrowers are charged for a rate lock depends on the lender. It could be baked into the cost of the offer or tacked on as a flat fee or percentage of the loan amount. The longer the lock period, the higher the fees, generally speaking.
Lenders have the discretion to void the rate lock and change your rate based on your personal financial situation. Say you take out a new line of credit to cover an emergency expense during the mortgage underwriting process. This could affect your credit and debt-to-income ratio, causing the lender to reevaluate your eligibility for the offered rate and financing.
Lenders also determine the mortgage rate based on the types of houses a borrower is looking at: A primary residence vs. a vacation home or investment property, for example, would influence the interest rate.
Recommended: A Guide to Buying a Duplex
Consequences of Not Locking in Your Mortgage Rate
There are risks to not locking in a mortgage rate before closing.
If you don’t lock in a rate, it can change at any time. An uptick in interest rates would translate to a higher monthly mortgage payment. While a slight bump to your monthly payment may not require mortgage relief, it could cost thousands over time.
For example, the monthly payment on a $300,000 loan at a 30-year fixed rate would go up by $88 if the interest rate increased from 4% to 4.5%. This would add up to an extra $31,611 in interest paid over the life of the loan.
You can use a mortgage calculator tool to see how much a rise in rates could affect your mortgage payment.
Furthermore, a higher monthly payment might potentially disqualify you from financing, depending on the impact on your debt-to-income ratio. After a jump in interest rates, borrowers may need to make a larger down payment or buy mortgage points upfront to obtain financing.
Even if you lock in a mortgage rate early on, you could face these consequences if it expires before closing. Deciding when to lock in a mortgage rate should account for any potential contingencies that could delay the process.
If you’re unsure, ask your lender when you should lock in.
What to Do if Interest Rates Fall After Your Rate Lock
The main concern with mortgage rate locks is that you could miss out on a lower rate. In most cases, buyers will pay the rate they are locked in at if the prevailing interest rate is less.
A float-down option, however, protects you from rate increases while letting you switch to the lower interest rate at closing.
Float-down policies vary by lender but generally cost more than a conventional rate lock for the added flexibility and assurance. It’s also possible that a float-down option won’t be triggered unless a certain threshold is met for the drop in rates.
It’s worth noting that borrowers aren’t committed to the lender until closing, so reapplying elsewhere is an option if rates change considerably.
Pros and Cons of Mortgage Rate Lock
Back to the big question: Should I lock my mortgage rate today? It’s important to weigh the pros and cons to decide when to lock in a mortgage rate.
| Pros | Cons |
|---|---|
| Locking in a rate you can afford lessens stress during the closing process | A rate lock might prevent you from getting a better deal if rates fall later on |
| You could save money on interest if you lock in before rates go up | If a rate lock expires, you may have to pay for an extension or get stuck with a potentially higher rate |
| Lenders may offer a short-term rate lock for free, providing a window to close the deal if rates spike but an opportunity to wait it out if they drop |
The Takeaway
A favorable interest rate can make a difference in your home-buying budget. But when to lock in? It’s important to choose a lock period that gives the lender ample time to process the loan to avoid extra fees or a potentially higher rate.
Buying a home is a major financial and life decision. Check out SoFi’s help center for mortgages for resources and tips about the home-buying process.
Are you in the market for a mortgage? SoFi offers mortgage loans with competitive rates and flexible terms.
FAQ
How long does a rate lock period last?
Rate locks usually span 30 to 60 days, but can be shorter or longer depending on the agreement. It’s not uncommon for lenders to offer a free rate lock for a designated time frame.
Should you use a mortgage rate “float-down”?
If you’re worried about missing out on low interest rates, a mortgage rate float-down option could let you secure the current rate with the option to take a lower one if rates drop. Take note that these agreements usually outline a specified period and minimum amount the rate must drop to activate the float-down.
How much does a rate lock cost?
Lenders don’t always charge for a rate lock. If they do, you can expect costs to range from 0.25% to 0.50% for a 60-day lock period. A longer lock period or adding a float-down option typically increases the rate lock cost.
What happens if my rate lock expires?
If your rate lock expires before you’ve finalized the deal, you can choose to extend the lock period (usually for a fee) or take the prevailing rate when you close on the loan.
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