What Is a Mortgage Rate Lock? And When Should You Lock Your Interest Rate?

Mortgage rates can change from day to day—and sometimes within the same day. A rate lock protects you from these market fluctuations while your loan moves toward closing, assuming the transaction and loan terms don't materially change. Most rate locks range from 15 to 60 days, and in some instances can be even longer.

Why Not Lock Immediately?

Sometimes locking early makes sense. Other times, buyers choose to "float" their rate temporarily, meaning their pricing remains subject to market changes.

If rates improve, floating can benefit you.

If rates worsen...Well, that's when floating suddenly becomes less fun.

Trying to perfectly time mortgage rates is a lot like trying to perfectly time the stock market. Hindsight is always 20/20.  Although market indicators can be evaluated ahead of time, there's no guarantee in the rate lock realm.  What I tell my clients who are under contract to buy a home is this: "If you like it, or don't want it to go up, lock it!"

What Happens If Rates Fall After You Lock?

In most cases, when a lender locks in your rate, they are also hedging, or locking, in the loan with their investors as well.  This means that the lender is not winning or losing on a day-to-day basis with market movements as well.  All are protected and secure with the terms agreed upon.

Many lenders offer a feature called a "float down" - which means that in the even of significant market improvement (each lender will carry their own unique definition of "significant"), where you can benefit from these market movements by the lender renegotiating the rate lock with the end investor.

What Happens If Closing Is Delayed?

Rate locks are for a finite period of time, and thus they will eventually expire.

If your closing gets pushed beyond the lock period, an extension may be required—and extensions will typically cost you money which is added to your closing costs.

This is why your lender should understand the expected closing timeline before choosing the lock period.  Saving a little money with a shorter lock isn't particularly helpful if you later pay to extend it.

Can a Locked Rate Ever Change?

Though it is not common, rate locks can change.  A rate lock assumes the underlying loan scenario remains consistent.

Changes to things like:

• Loan amount

• Down payment

• Credit profile

• Property

• Loan program

Will affect pricing.  If one of those parameters change, the terms of your lock can change.  "Locked" doesn't mean every aspect of your mortgage is frozen in carbonite.

Another way to think of a rate lock in this case is that a rate lock is securing the rate sheet that is available on the day of lock.  If you decide later that you way to buy down your rate more, you can still do that.  Or if you want a higher rate with lower cost, you can make that adjustment as well.  But- the options available on the day of lock are what you've got to work with.

Key Takeaway

A rate lock is essentially risk management. You're choosing certainty over the possibility that the market may improve.

There isn't always one obviously correct moment to lock.

The important thing is understanding:

• How long you're locked

• Whether there's a cost

• What happens if closing is delayed

• What happens if rates fall

• What changes could affect your locked pricing

You probably can't perfectly predict tomorrow's mortgage market.

Neither can the guy on Facebook who types in all caps.

Build a strategy instead.

-Brian Kimball, Sr. Mortgage Advisor/Team Leader, The Lighthouse Group at Waterstone Mortgage