Mortgage Rate Lock-ins 101

Is Locking in a Mortgage Rate Smart?

Mortgage Rate Lock-ins 101
May 28, 2014

When you are shopping for a home mortgage, you will probably be given the opportunity to “lock in” an interest rate when you are initially approved for your loan. This enables you to fix the interest rate you’re quoted upon loan approval for a limited period of time.

Mortgage interest rates can be volatile, changing on a day-to-day basis. By locking in your quoted rate, you don’t have to worry about your mortgage rate (and your monthly payment) rising during the time period between when you are initially approved for a loan and the loan actually closes.

Standard vs. Extended Lock-In

Most lenders will provide a standard 30-day rate lock at no additional charge. This will protect you from rising rates for 30 days after your mortgage is approved. But there is no guarantee that your loan will close within 30 days, so you could be exposed to rising rates if your mortgage takes longer than this to close.

This is why most lenders will allow you to lock in your rate for longer than 30 days. For example, you could lock in your interest rate for 45, 60 or even 90 days after the date of your loan approval if you choose. There is usually a cost to such an extended lock-in, either in the form of additional points (a point is equal to one percent of the loan amount) or a slightly higher interest rate. The longer the rate lock, the more it will cost.

So is locking in an interest rate a good idea in today’s mortgage rate environment? This depends on a couple of different factors:

  1. Do you expect it to take longer than 30 days for your loan to close? You should ask your lender to give you an honest assessment of how long he or she thinks it will take for your mortgage to close. This will depend on a variety of different factors, including the current backlog of mortgage applications in the lender’s underwriting department and whether a third party is involved in your mortgage. VA and USDA mortgages, for example, can take weeks longer to close than traditional mortgages.

  2. Do you think that interest rates will rise or fall in the future? This, of course, is the proverbial $64,000 question. If you expect rates to rise over the short term, and you think there is a good chance your mortgage will take longer than 30 days to close, then you will probably want to lock in your rate beyond the standard 30-day lock-in.
What If Rates Fall?

There is also a risk in locking in your mortgage rate beyond 30 days: the risk that interest rates could actually fall in the short term. This has occurred recently, with mortgage rates in May of 2014 hitting their lowest levels in six months -- despite near-universal predictions of rising rates. If this happens while you lock in a mortgage rate, you will not be able to benefit from a lower mortgage rate and monthly payment. For an additional fee, some lenders will allow you to “float down” to a lower rate if rates do drop. However, most do not actively market this float-down option, so if it is something you are interested in, ask your lender about it.

With mortgage interest rates still near historic lows, most experts believe that it’s not a matter of if , but when , rates start to rise — at least from a longer-term perspective. In the short term, though, interest rates can be volatile and unpredictable, moving either up or down on a daily basis. The answers to the two questions listed above will give you the best guidance in determining whether an extended mortgage rate lock-in is a smart move for you.

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