Mortgage interest rates can fluctuate from day to day based on a range of market factors. If you’re buying a home or refinancing, the rate you’re quoted today may be higher by the time you close, increasing your borrowing costs and monthly payments.
A mortgage rate lock lets you freeze a preferred rate and protect yourself from that risk. Here’s what you need to know.
How Mortgage Rate Locks Work
A mortgage rate lock is an agreement between you and your lender that locks in your interest rate for a specific period, usually 30, 45, 60, or 90 days. During that period, your rate won’t change even if market rates rise.
You can typically lock your rate any time after submitting a loan application, but every lender has its own rules. Your lock period must be long enough to cover the period until your closing date.
Many lenders offer rate locks at no upfront charge but build in a slightly higher rate, typically 0.25% to 0.5%, to compensate. Others charge an upfront fee. Extensions past your lock deadline are usually available for an additional fee or rate adjustment.
The Float-Down Option
Worried that rates might drop after you lock in? A float-down option lets you lock your rate for a set period while still being able to lower it if market rates fall before closing. It’s a way to get the best of both worlds, protection against rising rates and the ability to benefit if rates drop.
The tradeoffs: lenders charge a separate fee for this option, and you’re typically only allowed to use it once per loan.
Who Should Get a Rate Lock?
A rate lock makes the most sense if you:
- Plan to close within the next 30 to 90 days and want protection from near-term rate increases
- Are operating on a tight budget and need certainty about your future monthly payment
- Are in a favorable rate environment and want to lock in a low rate before it rises
- Simply want peace of mind that your rate won’t change while you finalize the transaction
Pros and Cons of a Rate Lock
Pros:
- Protects against rate increases between application and closing
- Provides certainty about your future monthly mortgage payment
- Makes it easier to budget and plan financially during the homebuying or refinancing process
Cons:
- May cost more if the lender charges a fee or a slightly higher rate in exchange for the lock
- If rates fall after you lock and you don’t have a float-down, you miss out on the savings
- Longer lock periods typically come with higher fees or rates
- If your closing is delayed beyond the lock period, you may need to pay for an extension
When to Lock In Your Rate
There’s no universally perfect moment, but a good rule of thumb is to lock when you’re confident you’ll close within the lock period, typically 30 to 90 days. Most lenders recommend locking after you’re under contract and have a confirmed closing date, reducing the risk of a costly extension.
If you’re in a volatile rate environment and ready to move quickly, locking as soon as you begin seriously shopping may make sense. If you’re still early in the process and your timeline is uncertain, it may be worth waiting before committing to a lock.
Rate Lock in Practice: An Example
Say you’re borrowing $300,000 for a 30-year fixed mortgage at 6%, and you expect to close within 60 days. If you lock in today and rates rise to 7% by closing, you’ll save roughly $197 per month, which is about $2,364 per year, compared to someone who didn’t lock and had to close at the higher rate.
On the other hand, if rates drop to 5.5% before you close and you don’t have a float-down in place, you’d miss out on those savings. That’s the trade-off.
The Rate Lock Process
- Get preapproved. This establishes the rate you qualify for and how much you can borrow.
- Shop and compare lenders. Compare rates, fees, and loan terms before committing.
- Submit your loan application.
- Lock your rate. Confirm the lock period in writing with your lender.
- Close on your loan before the lock expires.
Alternatives to a Rate Lock
If a rate lock doesn’t feel right for your situation, an adjustable-rate mortgage (ARM) may be worth considering. ARMs have an initial fixed-rate period, typically 1 to 5 years, after which the rate adjusts based on market conditions.
An ARM can make sense if you expect rates to fall in the near future, or if you don’t plan to stay in the home longer than the initial fixed-rate period. Just be prepared for the possibility that your rate and monthly payment could increase once the adjustment period begins.
Before You Commit
A rate lock has real value, but it’s not cost-free, and it comes with trade-offs. Before locking, consider your timeline, your confidence in rate direction, and your risk tolerance. The longer the lock, the more it typically costs. And if rates drop significantly after you lock without a float-down option, you may regret the decision.
If you’re planning to move or refinance again in the near future, a lock may not be worth the cost. Use our break-even calculator to see how the numbers stack up for your situation, and when you’re ready, start your refinance application with Refi.com today.
