Understanding Mortgage Rate Locks: Benefits and Considerations

As you shop around for a mortgage, you’ll notice that mortgage rates change throughout the day. The rate you see in the morning may be higher or lower than it is in the afternoon. These changes can be frustrating for homebuyers trying to budget for a new monthly payment.

A mortgage rate lock lets you freeze your interest rate during the mortgage process, avoiding typical market fluctuations. However, there are some instances where your rate could change, even with a mortgage rate lock, so it’s important to know the ins and outs of this feature.

We’ll go over whether rate locks are a good idea and how to decide if (and when) you should lock your rate, plus what to keep in mind before you commit.

What is a mortgage rate lock?

A mortgage rate lock is essentially a guarantee that your interest rate won’t go up before you close on your home. Locking in a lower mortgage rate could save you thousands of dollars in interest and lower your monthly mortgage payment compared to getting a mortgage with a higher rate. You’ll typically need to pay a fee to your mortgage lender to get a mortgage rate lock, but it could be well worth the cost.

Rate locks aren’t permanent. They usually expire after a month or two, with longer locks usually costing more. Choose the rate lock period that works best for your situation and budget.

How and when to lock in a mortgage rate

You can pay the deposit to lock your mortgage rate right away, once your mortgage is approved, or you can wait to lock it in if you think rates will drop before you close. 

You have until five days before closing to secure the rate lock. The timing is up to you, so it’s worth it to keep an eye on interest rate trends. Start paying attention so you can make an informed decision, but don’t try to time it perfectly. 

“Timing a rate lock isn’t about perfection. It’s about strategy,” says Ryan Fitzgerald, owner and broker at Raleigh Realty in North Carolina. “The best time to lock is once you’re approved for your loan and confident in your lender’s terms.” 

If you want added protection, consider a mortgage rate lock with a float-down option. This option lets you secure your mortgage rate while also retaining the option to “float down” to a lower rate if interest rates fall before you close.

“That way, even if you lock in a rate, you still get a chance to snag a lower one if rates drop before closing,” said Mike Roberts, co-founder of City Creek Mortgage in Draper, Utah. “Still, this usually comes with conditions or fees, so do the math and see if it's worth it for your situation."

Benefits and risks of locking in a mortgage rate

While locking in a low mortgage rate may seem like a no-brainer, rate locks have some downsides, too. Let’s go over the pros and cons of mortgage rate locks so you understand what you’re signing up for before you commit.

Benefits

• Rate protection: Locking your rate means it won’t change, even if rates in general go up.
• Budget stability: Avoid guesswork by knowing exactly what your payments will be. 
• Potential to save money: Securing a lower interest rate can save you tens or hundreds of dollars on your mortgage every month.

Risks

• It can cost you: Rate locks often come with fees, and extended rate locks can be expensive.
• Rates could drop further: Your rate won’t budge, even if market rates drop below what you’ve locked in.
• Changes can still happen: There are some circumstances, such as a drop in your credit score or a change to your finances, that could void a rate lock. And if your closing is delayed beyond the rate lock expiration date, you could lose the rate if you don’t pay to extend the lock.

Understanding rate lock fees and other considerations

There may be a fee to lock your mortgage rate. The cost will depend on how long your rate lock will last and how much your lender will charge. If there is a fee, it’s typically a small fraction of the loan amount – say, 0.25% or 0.5%. However, many lenders will let you lock your rate for 30 days for free.

If your closing is delayed, that could mess up your rate lock. You can ask your lender about extending it, giving you more time to close, but rate lock extensions can carry a cost. Talk to your mortgage lender for specifics.

How to decide if and when you should lock in your rate

Locking in your mortgage rate can give you some clarity and peace of mind during an otherwise uncertain process. It takes one variable out of the equation, letting you focus on the rest of the homebuying journey. But it makes sense that you want to get it right. Here are some strategies you can use to decide if and when to lock your mortgage rate.

Set it and forget it

The simplest strategy is to lock in the first interest rate that works for you and your budget. “Let’s not step over dollars to pick up pennies,” said Kyle McCort, loan originator for NFM Lending in Ohio. Rates can be volatile, but they often remain in the same general ballpark. “Very rarely does it make sense to try and play the market, because, as we've all seen, timing the market’s impossible,” he said. 

“My advice to the client is always the same,” offered Mike Miklaus, president and broker at Integrity Mortgage in California. “Why take on the stress of interest rate risk? We have secured the home you desire at a payment you can manage, so let's move forward with clarity.”

Lock and shop

Another option is to lock your rate before you shop for a home, instead of after you’ve made an offer. Some lenders call this method “lock and shop.” It gives you security knowing what your rate will be while providing more time to find the perfect home. 

“The downside of doing a lock and shop is you have extension costs,” McCort said. The process usually begins with a detailed mortgage pre-approval, which can speed up closing, but if you don’t find a home and close before the lock period ends, you’ll need to start over or pay to extend it, if that option is available.

Pay for the float-down

Another option for covering yourself against interest rate risk is to pay for the float-down option. This is often an added cost, but in return, you pick up the option to float down to a lower rate if rates drop. You and your lender will agree in advance on the cost and time frame of the float-down, as well as what size rate drop will trigger the float.

Don’t lock

Finally, you can always decline to lock the rate if you want, and accept whatever mortgage rate is in effect when it’s time to close. While you risk rates going up, they could also come down. If you suspect rates will fall or want to save on the cost of a lock, you can skip the process altogether.