Mortgage Rate Locks: How They Work

When considering a mortgage rate lock, get the terms and time frame you need.

A mortgage rate lock, also called a lock-in, is a lender's promise to hold a particular interest rate, usually for a specified amount of time, say 30, 45, or 60 days. Whether buying a house or refinancing, people who don't use a rate lock are at the mercy of the mortgage market while it ebbs and flows as the loan goes through processing—a 4% rate when you begin the loan application process, for instance, could rise to 4.5% by the closing. This increased rate means paying a lot more interest over the life of the loan.

Locking the rate is a great way to protect yourself from rising interest rates while your loan is processed and you're preparing for the closing on the house.

What Is a Rate Lock?

With a rate lock, your interest rate won’t change if you close within the specified time and you don’t make changes to your application. But if something in your application changes, like your loan amount, credit score, or verified income, the rate can change.

How a Higher Interest Rate Can Cost You

If you don’t get a rate lock and interest rates rise, you’ll have to pay more interest. Not only does a higher rate mean you’ll pay more interest, but it can also increase other loan costs. For example, it might mean:

  • you must pay more points, or
  • you have to put more cash down. (Because higher interest rates mean higher monthly payments, the lender might want more cash down to keep your monthly payments in line with what you can afford or what the lender will allow.)

If you're refinancing to stave off foreclosure, and rates increase, you could lose your home if the lender won't approve you for a higher rate. In a refinance, when foreclosure isn’t an issue, you have options to save the deal in case rates go up, like taking out less cash or waiting for rates to go down.

What If Interest Rates Fall?

If interest rates fall during the lock period, you usually can't take advantage of the lower rate unless you:

  • have included a "float down" provision in the original lock and advise the lender that you want to take advantage of it, or
  • rewrite the rate lock at an additional cost.

When you include a float down option in your rate lock, the lender must give you the locked-in rate if interest rates go up before closing. If rates go down, you have the right to lock again at a lower rate. Rates generally have to be a quarter- to a half-percentage point better than your locked rate to get a float down. Because a float down option increases the lender's risk, the price of a float down is higher than the price of a lock without a float down.

The Mortgage Rate Lock Contract

Because rate lock provisions have many variations, be sure the lock contract’s language gives you the options and time frame that work best for you. The agreement should include all of the details, including:

  • the terms you've locked in
  • the lock's effective date
  • the lock cost
  • the lock's expiration date and time, and
  • any post-lock options.

When negotiating terms, here are some things to consider:

When to Lock Your Interest Rate

Lock the rate in as soon as you see the one you want or when you first apply for the mortgage. That way, your rate is locked as you spend time getting the application approved. Locking the rate is particularly important if you barely qualify at today's rates, and an increase would push buying right out of your reach.

How Long Should the Lock Last?

Before choosing a lock-in period, determine the average time for loan processing in your market. Ask your lender to estimate the time necessary to process your loan and verify the information with other realty and mortgage professionals. Locks average 30 days but can range from 15 to 60 days or more. Longer is usually better. If the loan doesn't close on time, lenders can extend your lock for free, charge more for the extension, or charge an additional percentage of the loan amount.

Shopping for a Mortgage Rate Lock

The cost of a rate lock is one thing to consider when you’re shopping for a mortgage. Look around for both the best lock-contract terms and the lowest, most fairly calculated cost, which vary from lender to lender.

Final Considerations

Once you lock in a rate, if you haven't already, quickly submit the application and other required documents. You should have previously checked your credit reports and prepared evidence of your income, employment, debts, assets, and additional relevant financial information. Stay in close contact with the lender to be sure that the application is progressing quickly enough.

Pay attention to deadlines. The benefits of the lock are good for only as long as the term of the rate lock. If you fail to complete your home purchase or don't refinance before the clock runs out and interest rates rise, you'll have to pay the increased rate, along with any other increased costs.

If you have a float down provision, keep your eye on the market. It's your job to alert the lender that you want to take advantage of falling rates.

Getting More Information

The Consumer Financial Protection Bureau offers further information about mortgage rate locks. Some states have specific rules that lenders must follow when granting lock-ins. To learn about the rules in your state, if any, contact the state agency that regulates the mortgage industry.

To learn more about the ins and outs of buying a home, get Nolo's Essential Guide to Buying Your First Home, by Ann O’Connell, Ilona Bray, and Marcia Stewart (Nolo).

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