Understanding Mortgage Rate Lock-Ins: Pros, Cons, and How They Work

Mortgage rates can change frequently, which can have a significant impact on the amount you pay when you refinance or close on your mortgage. If you want to secure a mortgage with a guaranteed interest rate, you can choose to lock in your interest rate. This guarantees that the interest rate will remain the same until closing, regardless of market changes, provided that the closing is not delayed beyond the deadline. However, there are risks associated with locking in your interest rate.

What is a mortgage rate lock-in?

When you shop for a mortgage, the lender will prepare a "mortgage loan offer," detailing the proposed loan rate, term, and monthly payment if the loan is approved. The lender will then offer you the option to "lock in" your interest rate. If you decide to lock in your rate, it will be guaranteed – or locked in – for a specific time frame, usually through your anticipated closing date.

Why do mortgage rates change?

Mortgage rates fluctuate based on a variety of factors, including supply and demand, economic changes, the federal funds rate, mortgage-backed securities, and your credit score.

How does a mortgage rate lock-in work?

A rate lock-in freezes the proposed rate for an agreed-upon amount of time, typically 30 to 60 days. Let's explore three different scenarios to understand how locking in your mortgage rate works:

If rates go up:

If you have locked in your mortgage rate and the interest rate increases before you close on your home, your interest rate will remain the same, and you will avoid paying more in interest over the loan term.

If rates stay the same:

If you lock in your mortgage rate and rates stay the same, you have peace of mind through the process.

If rates go down:

If rates decrease before you close your home purchase, you will miss out on the lower rate – unless your lender provides a "float-down" option on your rate lock.

Float-down option: an alternative to locking in your rate

A mortgage rate "float-down" makes it possible to capture a lower interest rate for your loan before closing the home purchase, even if your rate is locked in. Each lender has specific policies about rate locks, float-downs, potential fees, and when they can be applied.

Pros and cons of locking in your mortgage rate today

Pros:

  • Locking in your mortgage rate today may be appealing because interest rates may increase after you lock in your rate.

  • You'll have peace of mind knowing what your monthly payments will be.

  • If interest rates increase, your rate is locked in, and you'll still pay the lower rate.

Cons:

  • You may miss out on lower rates if they decrease before you close.

  • If you're forced to extend the closing date, you may have to pay fees to extend the rate lock-in period.

  • Float-down options may have additional fees.

Mortgage rate lock-ins can provide peace of mind, but they do come with risks. It's important to talk to your lender about their specific policies and any potential fees. Additionally, make sure to consider your personal situation and the current state of the housing market before locking in your rate.

Mackenzie Larch