When Should You Lock in a Mortgage Rate?

It’s truly rare to finance a home without a mortgage.

In fact, 60 percent of homebuyers finance their homes with a mortgage, according to the National Association of Realtors (NAR).^[1] If you’re one of them, you’ll have to decide when to lock in your mortgage rate – after all, you cannot close a purchase involving a mortgage until you lock in your interest rate.

Here’s what you need to know about mortgage locking options, when you should lock, and how much it costs.

What does it mean to “Lock” a mortgage?

When you apply for a home loan, your lender quotes you a mortgage interest rate and closing costs. However, this quote is just an estimate until you formally lock in the interest rate and costs, usually in writing.

Without a formal lock, the lender is not obligated to honor the quoted rate and you are said to be “floating” your mortgage.

Floating a mortgage means you could ultimately close with a higher or lower interest rate than initially quoted. Mortgage rates move up and down all day as bond markets respond to changes in the economy.

You can choose to lock in your mortgage for periods ranging from seven days to 180 days.

The longer the rate lock period, the more it costs. Normally, mortgage lenders quote rates with 30-day locks. You’d get a discount for choosing a seven- or 15-day lock and pay a premium for locks exceeding 30 days.

Once you have locked in your rate, the lender is obligated to honor the agreed-upon interest rate and cost, as long as you close within the locked period.

How does a mortgage rate lock work?

When you lock in your mortgage rate, you’ll normally sign a rate lock agreement.^[2] All mortgage rate lock agreements contain:

• An expiration date
• Your interest rate
• The mortgage program (like a 30-year fixed loan or a 5/1 ARM)
• The cost of your rate

You can sign in person, by fax or electronically with a service such as DocuSign. It’s smart to be able to prove that you locked in X rate for Y number of days in case there is any misunderstanding.

Once you sign this form, your lender will probably issue you an updated Loan Estimate form detailing the loan terms and closing costs. Any time the terms of your loan change, you’ll get a new Loan Estimate.^[3]

If you change mortgage lenders or loan programs, your rate is no longer locked, and you’ll have to renegotiate your closing costs and interest rate.

When should you lock your mortgage rate?

The decision to lock in a mortgage rate depends on your circumstances. A homeowner trying to refinance to a target rate won’t want to lock unless mortgage rates drop into that targeted range.

Otherwise, it makes no sense to refinance. However, a homebuyer with a contract and a closing date can’t afford to wait indefinitely for a specific rate.

Your tolerance for risk also matters. If an increase in interest rates could scotch your loan approval and your home purchase, you might want to lock in early even if it costs more.

Most people, however, look at locking in within 30 days of closing.^[3]

What if a 15-day lock would save you .125% over a 30-day lock, but you’re 17 days away from closing?

If there are no important economic reports coming up and financial markets are quiet, you can probably safely float your interest rate, lock in when you’re 15 days out, and save. But if there is a lot of economic and political turmoil, that strategy could be risky. In that case, you might choose to lock but stay in close contact with your lender so you can move quickly if necessary.

What is “float down?”

With a traditional lock, both the lender and borrower make a commitment and assume some risk. The lender commits to providing the agreed-upon rate even if interest rates go up. The borrower agrees to pay the agreed-upon rate even if mortgage rates go down.

Those who want to get the lower rate no matter what happens can choose to purchase a “float down” option when they lock or even after locking. It usually costs 0.5% to 1% of the loan amount. A float-down provision on a $300,000 loan might cost $1,500 (0.5%).

Float down options allow you to get the lower rate if interest rates have fallen when it’s time to close on your mortgage. There is no standard float down agreement, so pay attention to all provisions.

Often, for example, the rate at closing must be at least .25% lower for the float down provision to kick in. Some float-down agreements only apply to rates when it’s time to draw your final loan documents.

Others give you one chance during escrow to lock a lower rate if they drop before your closing date.

Should you change lenders if rates fall?

What if you have no float down and mortgage rates plummet after you are locked in? If you’re refinancing and the difference is substantial, it might be worth starting over with a new lender.

You can use a mortgage calculator to see if it’s worth doing. Just compare the potential savings with a new loan to the additional costs of starting over. If it makes sense, cancel your loan application and find a lender with a better interest rate.

However, if you’re under a purchase contract with a firm closing date, it could be dangerous changing lenders mid-escrow. Here are the risks:

• Earnest money: The seller probably has the legal right to keep earnest money if you fail to close or in some cases fail to close on time. If there is any chance that a new lender might decline your application or fail to complete the transaction on time, avoid restarting your loan.
• Paperwork: Restarting your loan means a new lender will be pulling your credit and you’ll have to update all of your income and other documentation.
• The house: Restarting an application, especially if it includes a new appraisal, could push you out of contract. Average closings take over 45 days as of this writing according to analysts at Ellie Mae.^[5] If your seller takes back-up offers, you could lose the house by failing to close on time.
• Fees: There’s a good chance you’ll have to pay third-party fees (such as the credit check and home appraisal) twice.

If your loan approval was not a slam dunk, don’t start over.

If you have challenges such as low credit scores, a small down payment, hard-to-verify income, or anything requiring a lot of explaining and extra paperwork, the lender-switch strategy is not great.

What happens if you don’t close your loan on time?

You cannot close on your mortgage if you’re not locked.^[6] So if your rate lock expires before closing day, one of three things will happen:

• Rates are the same or lower than they were when you locked in. In that case, you can relock at the same rate and close at that rate for no extra costs.
• Rates are higher than they were when you locked in. If your closing is only delayed a day or two, most lenders will allow you to extend your lock, often at no charge.
• If your closing is delayed by more than 48 hours, you’ll have to pay to extend your lock (.125% to .25% for a week or two). The other option is renegotiating a new lock or waiting and hoping rates fall back so you can re-lock for free before closing.

The cost of extending or relocking depends on how much mortgage rates have risen and on your lender’s policy. It also may depend on whose fault the delay is. If it’s yours, expect to pay. If it’s the lender’s, you should be able to extend for free.

If you believe that your closing may be delayed and current mortgage rates are the same or lower, relock to avoid potential increases.

If you are locked in a mortgage for 30 days and after two weeks you realize that it will take 40 days to close, just relock the same loan for free with a new 30-day period.

Can you lock with more than one lender?

You can lock in a mortgage rate with more than one lender if you’re willing to deal with multiple mortgage applications, fees, and a lot of paperwork.

Some borrowers lock a rate with Lender A and let their rate float with Lender B.

That way, if rates fall, they can lock in a lower rate with Lender B and cancel their application with Lender A.

Most lenders don’t charge any kind of rate lock fee (unless you’re locking for more than 30 days) and there’s no cancellation fee. However, look out for credit report and appraisal fees. You will probably have to pay them twice if you go with Lender B.

Can you negotiate mortgage rates after locking?

Maybe. Negotiating is easiest to do when you’re in the shopping-around phase, but if you’ve already locked and rates fall, you might still have wiggle room.

Lenders invest time and money processing loans, and they lose if you don’t close. So they may be willing to work with you, and it can’t hurt to ask.

Closing on your mortgage in a timely manner can ensure you can focus on other aspects of a home-buying process, such as negotiating on closing costs and securing title insurance.