Should you lock in an interest rate on a mortgage loan?

If you find yourself close to buying a house when interest rates are decent — and you're already preapproved for a loan — consider locking in that low rate so you can confidently plan for what your monthly mortgage payments will be over the next 30 years.

Here are the basics to know: 

• Mortgage interest rates react to market conditions and can change by the day, sometimes by the hour. 
• Regardless of what happens in the economy, once you lock in a favorable rate, it stays the same until closing — as long as there are no changes to your loan. 
• Rate lock programs are typically available for 30, 60, or even 90 days. sometimes longer. The time frame depends on which lender you choose to work with. 
• Not locking in can be risky because you'll end up with whatever the mortgage loan interest rate is at closing. 

Let's answer some questions about whether a locked rate is a good idea for you and your new home purchase.

What does an interest rate lock-in do?

A rate lock freezes your interest rate quote for a specific period so you can estimate exactly what your closing costs and your monthly mortgage payments will be. The rate lock protects the borrower against future changes. If rates go up after you're locked in, your interest rate and the monthly payment you can expect to pay will not change — as long as you close on time.

What is the best time to lock in a rate?  

That's a good question — and there is no correct answer. Some lenders won't offer a rate lock until the mortgage application is completed and the home seller has accepted your offer. Some lenders might offer “lock & shop” programs that allow you to lock in a rate while still househunting. However, that puts pressure on you to negotiate a purchase before the rate lock period expires.

When do locked rates expire?

This is really up to you; it depends on how much you're looking to borrow, your scheduled closing date and your risk tolerance. If you already have an offer accepted and the closing date is six weeks away, you'd want to lock in for 60 days. This will ensure that your rate lock doesn't expire before closing — even if the closing date slips by a day or two. For new construction loans, you may be offered a longer lock-in timeframe. Depending on the project, new construction rate lock-ins can be six months, nine months or even longer.

Are longer lock-in periods more expensive?

The longer you lock in a rate, the more expensive it will be. This makes sense because the money the lender is reserving for you is being set aside at current market rates for an extended period of time and can't be used for another purpose. If rates go up, the lender could have made more money lending at a higher rate. So, locking in for 90 days will probably cost more than locking in for just 30 days.

How do I lock in a rate?

Locking in at a reasonable rate is as easy as picking up the phone. Just call your loan officer and let them know that you'd like to lock in a rate, or plan ahead and let them know you're interested in a locked rate so they can proactively call you when they feel the timing is right. After your rate is locked, your loan officer may send you some additional paperwork to sign.

Are there disadvantages to locking in a mortgage interest rate?

If you're happy with the rate you locked in and your closing goes smoothly, you shouldn't see any downsides. But, if your home purchase takes longer than expected, extending your rate lock might cost a bit more. Also, a rate lock may block you from taking advantage of lower interest rates if they happen to drop. On the other hand, you'll sleep well knowing your rate won't be going up, and if rates move down significantly, you may be able to take advantage of a “float-down” option.

Tell me more about the term 'float down.' What does that mean?

Locked-in rates with a float-down option give you more leeway when interest rates go up and down. With a basic lock-in, your lender must honor the locked-in rate even if the interest rates they offer go up before closing. But if rates go down, you might want to lock in the new, lower rate. It could make your monthly mortgage payment a little lower. 

Are there restrictions with a float down?

Float-downs come with a cost because you're canceling your old rate lock, so expect rate locks with float-down options to be slightly higher than the price of a regular rate lock. Also, many lenders want to see rates dip at least 0.25% before agreeing to the new lower rate. Finally, it's typical that a lender may limit you to just one float-down per rate lock.

What happens when the locked-in rate expires?

When buying a home, anything can happen: a seller can go silent, an inspection can take longer than expected or an appraisal could be delayed. If those scenarios push out the closing date, your rate lock could expire. When it does, your interest rate is subject to movements in the market. You'll have to set up an entirely new rate lock — at current rates. If they're lower, great, but it's another story if rates jump, as we saw in June 2022. That's when the Federal Reserve lifted interest rates by 0.75%, the largest rate hike since 1994. 

Can I extend a locked rate before it expires?

Depending on your chosen lender, it may be possible to extend a locked-in rate. Make sure you and your loan officer are on the same page with timing and that they know to call you if you're approaching the end of a lock term. Many lenders will extend the lock for a fee, typically a few basis points (or .0001% of the total loan amount) per day. These fees, while small, illustrate why it's wise to choose a rate lock period that gives you a little wiggle room in case closings get delayed.

What if my loan terms change after I lock in my rate?

There are many ways that a loan can change. Maybe you decide to put down a bigger downpayment or move from a 30-year to a 15-year fixed rate mortgage. Or perhaps the home appraisal came in drastically higher or lower than anticipated, your lender couldn't verify some of your income or your credit score took a hit because you missed a car loan payment. If any of these apply, speak to your loan officer as soon as possible to see what options you might have.

A Movement Mortgage Loan Officer can guide you 

A mortgage interest rate lock is an agreement between you and the lender. You get an attractive interest rate and set fees as long as you don't make any substantial changes to the loan and your closing day falls within the lock-in period. Remember, once you get a good rate, you won't want it to expire before you close. 

We hope this blog answers some of your questions, and we hope you lock in a great rate! When you're ready to request a rate lock or to find out more, call a local Movement Mortgage loan officer.