What Is a Mortgage Rate Lock and How Does It Work?

A mortgage rate lock gives you one less thing to think about as you work toward buying a home.

What Is a Mortgage Rate Lock and How Does It Work?
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One thing house hunting teaches you is that some things are out of your control. You cannot control home prices, the amount of competition you will have, or whether the interest rates will change during your search. There may be no way to control what is happening in the real estate world, but you can lock an attractive interest rate into place.

What is a mortgage rate lock?

A mortgage rate lock (sometimes called rate protection) is a tool that allows you to "lock" an interest rate in place for a set period -- typically 15 to 60 days. If closing is postponed for any reason, you can usually extend the lock period.

If you lock in an interest rate of 4%, the rate will not change during the agreed-upon term, no matter what else happens in the market. Even if the interest rate has risen to 6% by the time you close on your mortgage, the 4% rate you locked in will be honored. Assuming your own circumstances (such as employment and credit score) do not change, neither will your rate.

When should you request a rate lock?

Some mortgage lenders allow you to lock in rates as soon as your mortgage has been pre-approved, and others will not offer a lock-in until you present a purchase agreement.

Unless the rates are extraordinarily low, the best time to lock a rate is after you have signed a purchase agreement. That's because you want your lender to have more than enough time to process your loan before the rate lock period expires. Ask your lender about how long it normally takes them to get to closing and build in extra days for unforeseen circumstances.

How much does a rate lock cost?

Many mortgage lenders do not charge for a rate lock or rate extension. Among those that do, you are typically looking at 0.25% to 0.50% of the total loan amount for a rate lock (of 60 days or less), and between 0.06% and 0.375% for an extension. That means if you borrow $300,000, it will cost between $750 and $1,500 for the initial lock, and $180 to $1,125 for an extension, payable at closing.

If you find a lender that offers everything you are looking for, do not let the fact that they charge for a rate lock discourage you. Here's why: A rate lock can save you thousands of dollars over the life of a loan and quickly pay for itself. Plus, lenders that offer an automatic rate lock will often build that cost into the loan in a different way.

Let's say want to borrow $300,000 for 30 years and lock in a mortgage at 4% interest. Your principal and interest payment would be $1,432 per month. Now, imagine that you did not lock in the interest rate early enough, and by the time you get to closing, the rate is 4.5%. That small difference means your principal and interest payments would be $1,520 per month instead, which is $88 more each month. By the time you pay the mortgage off in 30 years, you will have paid an extra $31,680.

Advantages of a rate lock

Rate locks are popular with buyers for a reason. Here are a few advantages of locking your rate into place early:

  • You are sure of your interest rate and are in a better position to determine how much house you can afford.
  • You can focus on what you need to do to get to closing, rather than worry about what is going on with interest rates.
  • You can usually extend the low rate for longer if needed.

Disadvantages of a rate lock

Rate locks can be helpful but are not perfect. Here are two of the reasons buyers think twice before locking in an interest rate:

  • Rates can change by the hour, and you have no way of knowing if the rates will go down before you close.
  • If interest rates do go down, you are stuck with the rate you locked in. The exception is if the original rate lock has a "float-down" provision written in to cover such a situation. If a lender does provide a float-down provision, you can expect to pay more for the rate lock.

When it's time to lock in your rate, figure out how long you are likely to need the lock in place. Then, oversee deadlines so that your lock does not expire before you close on the mortgage.