What Is a Mortgage Rate Lock

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Updated: November 1, 2024

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Managing your mortgage involves understanding its elements, including your mortgage rate. A mortgage rate lock can significantly impact your borrowing experience by securing your interest rate for a specific period. That protects you against rising interest rates during the lock period, offering peace of mind as you finalize your home purchase.

We'll explore what a mortgage rate lock is, when and how to use it and the factors that influence its duration and effectiveness. Understanding these aspects can help you make informed decisions throughout your mortgage journey.

Key Takeaways

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A mortgage rate lock secures your interest rate for a set period, providing stability and protecting against potential rate increases.

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You can lock in your rate for 15 to 60 days, with extensions available for a fee if needed.

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Lock in your mortgage rate when rates are rising or if your closing date is set and rates are competitive.

What is a Mortgage Rate Lock?

A mortgage rate lock secures your interest rate for a set period, providing stability in your mortgage experience. Since mortgage rates change often, locking in your rate can protect you from potential increases.

Locking in your mortgage rate at the right time can save you a significant amount of money. For example, the national average APR for a 30-year fixed-rate mortgage increased from 6.45% in March 2024 to 7.10% in April 2024. If you secured a $240,000 loan in March, your monthly payment would be $1,509, with a total interest of $303,269 over the loan's lifetime.

However, if you didn't lock in your rate and closed your loan in April, your monthly payment would rise to $1,613, and your total interest paid would increase to $340,633. Currently, the average APR for a 30-year fixed-rate mortgage in May 2024 is 6.72%, which might be a good time to lock in your mortgage rate.

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WHY MORTGAGE RATE FLUCTUATE

Understanding why mortgage rates fluctuate can help you better time your mortgage decisions. Economic factors such as inflation, unemployment and economic growth directly impact mortgage rates. In a strong economy, mortgage rates tend to rise due to higher borrowing costs associated with economic growth.

Federal Reserve policy also plays a crucial role. When the Fed raises or lowers the federal funds rate, mortgage rates often follow suit. Additionally, bond market movements influence mortgage rates, as rates tend to move in tandem with U.S. Treasury bond yields.

Finally, supply and demand in the housing market and individual credit scores can affect rates, with higher demand and lower credit risks typically resulting in lower mortgage rates.

Should You Lock in Your Mortgage Rate?

A mortgage rate lock is an option — you don’t need to get one if you don’t think it’ll benefit your situation. It’s best to consider the following points to determine whether securing a mortgage rate lock is in your best interest.

Pros and Cons of a Mortgage Rate Lock

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Pros
  • Protection Against Rate Increases. A mortgage rate lock provides security against unexpected hikes in interest rates, which could save you a significant amount in the long run.
  • Budgeting Certainty. Knowing your interest rate upfront can help you establish a solid budget, providing a clear idea of your future mortgage payments.
  • Rate Fluctuation Insulation. With a rate lock, you are shielded from the day-to-day volatility of mortgage rates, creating a stable environment for your home buying process.
  • Peace of Mind. Eliminating the worry about rising interest rates can offer mental and emotional relief, making the home buying experience less stressful.
  • Secure Planning. Having a guaranteed rate can simplify the financial planning aspects of home buying, allowing for better focus on other important aspects of the process.
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Cons
  • Missed Rate Drops. Once your rate is locked, you won't benefit from any potential rate reductions that may occur.
  • Rate Lock Expiration. If your closing process gets delayed beyond the lock period, you could risk losing your secured rate, possibly incurring additional fees to extend the lock.
  • Non-Transferable Locks. If you decide to switch lenders, your rate lock typically can't be transferred, meaning you'll have to negotiate a new rate.
  • Loan Term Modifications. If you need to change your loan's terms, it might result in losing the locked rate.
  • Rate Lock Fees. Some lenders may charge a fee for the rate lock service, especially for extended rate locks.

Take the time to reflect on your financial circumstances, the current market trends and your long-term goals before deciding whether a rate lock is right for you.

How Long Can You Lock in a Mortgage Rate?

While 30-day and 60-day locks are common, some lenders offer longer options, which might be beneficial, especially for construction loans. You should choose a lock-in period that comfortably covers your loan closing timeline, and if needed, ask your lender about extending the lock — just be aware that there may be a fee for this extension. Paying for a longer lock can sometimes be worthwhile to avoid rising interest rates.

If your rate lock expires before closing and you don't extend it, you'll need to pay the current mortgage rate at closing, which could be higher or lower than your locked rate.

When Is the Best Time to Lock in a Mortgage Rate

A mortgage rate lock can provide stability by securing your interest rate, but it's not always the best option. For instance, if rates are predicted to fall, locking in might cost you potential savings.

Understanding when to lock in your mortgage rate is important, as the timing can significantly impact your overall borrowing costs. Let’s explore some scenarios when securing a mortgage rate lock can bring the most benefit.

Locking In During a Rising Rate Environment

Sarah, a first-time homebuyer and software engineer, has been diligently saving for her dream home and has finally found the perfect place. With mortgage rates steadily climbing over the past few weeks, she's considering locking in her rate as she prepares to go under contract.

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SHOULD YOU LOCK IN YOUR MORTGAGE RATE?

Given the upward trend in rates, Sarah is concerned that waiting could result in an even higher rate when she closes on her home. By securing a mortgage rate lock now, she can protect herself from further increases, ensuring her monthly payments remain affordable. Researching recent trends and potential market impacts, like post-pandemic economic shifts, supports her decision to lock in her rate before it rises further.

Securing Stability Before a Fed Meeting

John is a small business owner who has been navigating the challenges of the economic landscape. He is now ready to buy a new home for his growing family. With a closing date set just after the next Federal Reserve meeting, John is paying close attention to potential interest rate changes.

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SHOULD YOU LOCK IN YOUR MORTGAGE RATE?

Understanding that the Fed's discussions often lead to rate increases, John decides to lock in his mortgage rate before the meeting. This move provides him with peace of mind, ensuring his interest rate remains stable regardless of any market fluctuations triggered by the Fed's decisions. By proactively researching the Fed's meeting schedule, John can safeguard his finances from unexpected rate hikes.

Ensuring Financial Certainty on a Tight Budget

Emily is a recent college graduate and a new teacher, excited about buying her first home. With a modest income and a carefully planned budget, she needs to ensure her monthly expenses remain manageable. Emily knows that mortgage rates can change unpredictably between her application and loan closing.

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SHOULD YOU LOCK IN YOUR MORTGAGE RATE?

Emily locks in her mortgage rate to avoid the risk of skyrocketing and straining her budget. This move gives her a clear sense of her future monthly payments, providing much-needed financial stability. By securing her rate, Emily can confidently proceed with her home purchase, knowing her budget won't be unexpectedly stretched by rising interest rates.

Locking In When Your Closing Date is Set

David, a marketing manager, and his partner have finally found their dream home. Their closing date is set for next month, and current mortgage rates are very competitive. They are eager to secure their financing and move into their new home without any last-minute surprises.

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SHOULD YOU LOCK IN YOUR MORTGAGE RATE?

With a fixed closing date and favorable rates, David decides to lock in their mortgage rate. This guarantees that their interest rate will remain the same until closing, regardless of market fluctuations. By locking in now, David and his partner can confidently plan their finances, knowing they won't face unexpected rate increases or the hassle of extending their rate lock.

How to Lock in a Mortgage Rate

When you’ve weighed your options and determined when you'd like to secure a mortgage rate lock, follow these steps to move forward with the process:

  1. 1
    Assess Your Financial Situation

    Make sure you have a solid grasp of your current financial situation before starting the process. That includes knowing your credit score, budget and down payment size.

  2. 2
    Consider Various Lenders

    Don't settle with your first lender — take time to explore multiple lending institutions. Different lenders can offer different rates and lock-in terms. Some may offer a lower rate but charge higher fees for it.

  3. 3
    Negotiate Terms

    Once you've chosen a lender, discuss the terms of the mortgage rate lock, including the interest rate, mortgage points and the length of the lock period. Remember, a longer lock period can be more expensive.

  4. 4
    Gather Required Documents

    When you’ve worked out the details, provide your lender with the necessary documents to process the rate lock. These usually include proof of income, your credit report and details of the property you intend to purchase.

  5. 5
    Review Your Lock Agreement

    Your lender will provide a lock agreement, which shows the interest rate, points and how long the rate is locked for. Ensure you understand all the terms before signing.

  6. 6
    Monitor Progress

    Keep track of your loan's progress to ensure it stays within the lock period. Delays can happen, and you might need to extend the lock period, which may translate to additional fees.

  7. 7
    Close Before Expiry

    Be sure to close the deal before your lock period expires, otherwise you might be subjected to current market rates, which could be higher.

Can Your Mortgage Rate Still Change?

Even with a mortgage rate lock, your rate might still change in very specific situations. These exceptions are rare but essential to know. Understanding them can help you better prepare for any unexpected changes. Let’s explore these:

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    Change in Loan Type or Down Payment

    If you initially applied for a conventional loan but later decide to switch to an FHA loan or increase your down payment amount, the terms and risk profile will change, prompting a reassessment and potential adjustment of your locked mortgage rate.

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    Unexpected Appraisal Value

    Suppose the home you wish to buy is appraised significantly lower than anticipated. In that case, the loan-to-value ratio increases, making the loan riskier for the lender and possibly leading to a higher mortgage rate despite the lock.

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    Credit Score Changes

    If you applied for a new credit card or missed a payment on an existing loan after securing a mortgage rate lock, your credit score might drop. This decline signals a higher risk to the lender, which could result in an adjusted rate.

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    Undocumented Income

    Imagine your lender initially considered your bonus income to qualify for the loan, but later, they cannot verify it. Without this documentation, your risk profile increases, potentially causing your lender to adjust your previously locked mortgage rate.

Frequently Asked Questions About Mortgage Rate Locks

Locking in your mortgage rate can be a complex decision, leading to questions about the process. We addressed commonly asked questions about mortgage rate locks to provide clarity in your home financing choices.

What does it mean to lock a mortgage rate?
Is it better to lock in a mortgage rate?
What if I lock in a rate and it goes down?
How long can you lock in a mortgage rate?
How early can you lock in a mortgage rate?

About Zachary Romeo, CBCA

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Zachary Romeo is a certified Commercial Banking and Credit Analyst (CBCA), and the Head of Loans and Banking at MoneyGeek. Previously, he led production teams for some of the largest online informational resources in higher education, with over 13 years of experience in editorial production.

Romeo has a bachelor's degree in biological engineering from Cornell University. He geeks out on minimizing personal debt and helping others do the same through people-first content.

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