What is a mortgage rate lock?

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In a Nutshell

A mortgage rate lock is a commitment from a lender that the rate you see on your loan estimate will be the rate you get at closing. If you think rates are going to go up before you close on the loan, you may want to lock in your rate.
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If you’re shopping for a mortgage, you’ve probably seen offers to lock in a mortgage rate.

A mortgage rate lock is a commitment from your lender that your interest rate at closing will be the same as the rate you’re offered now, as long as you meet the conditions of the lock. Mortgage rates change frequently, so if you don’t have a rate lock, the rate on your loan could go up or down before you close.

There are pros and cons to locking in an interest rate. If you like the offered rate, having a commitment from the lender means you don’t have to worry about the rate rising during the weeks or months between getting your loan estimate and closing on the mortgage. On the other hand, you may not be able to get a lower rate if mortgage rates decrease while the lender is processing your loan application.

One other potential downside: You may have to pay a fee to lock in a rate.

How does a mortgage rate lock work?

When you get a mortgage rate lock, your lender either tells you that your rate is being locked in or gives you a document stating the rate you’re being promised and the conditions that must hold for you to get that rate. If you aren’t offered anything in writing, ask for a written copy of the terms so you can review the fine print and refer to the terms later as evidence you entered into the rate lock agreement.

You might have to pay a fee when you lock in the rate, and you may not be able to get the fee back if the lender turns down your mortgage application or if you decide not to close on the loan. Alternatively, you might owe the fee at closing.

An agreement to lock in a mortgage rate states how much time you have until the lender will no longer hold the rate for you. This is usually a month or two, but it can be as short as a week or as long as 120 days.

The document also lays out the conditions that have to be met for the agreement to be valid. For example, you might lose your rate lock if your credit score goes down, if you change the size of your down payment, or if the appraisal gives a different value for the home than what you thought it was worth.

There are a few ways your mortgage lender might lock in your rate. First, the lender might lock in both your interest rate and your points. Mortgage points are upfront fees that you pay the lender to lower your mortgage rate, and each point is 1% of your loan’s value.

Second, the lender might lock in your interest rate but not your points. In this case, the number of points you pay upfront could go up or down depending on how mortgage rates change between the time you get your loan estimate and when you close. So your interest rate at closing would be the rate you locked in — but your closing costs could end up being higher or lower than the current estimate. Sometimes a lender who takes this approach will allow you to lock in the number of points too when you get nearer to closing.

Finally, you might be allowed to wait and lock in your rate later. In this scenario, you lock in your interest rate and points further along in the application process but prior to closing on the loan.

Can you get a lower mortgage rate after locking?

You may be able to lower your mortgage rate after locking in a rate if your lender offers what’s called a float-down option. This provision typically gives you one chance to lock in a better rate if rates go down. There may be restrictions on when you can exercise this option. For example, you may be allowed to lock in a lower rate only if the lender’s rates decline by a significant amount, or you may have to decide whether to commit to a lower rate by a certain number of days before closing.

If you decide to take advantage of a float-down option, you might have to pay a fee to lock in the new rate.

Should I float or lock a mortgage rate?

If you like a rate you’re offered and think rates may go up by the time you close, you may want to lock the rate. But if you think rates are going to drop, locking in a rate could result in closing at a higher rate than you would get otherwise, unless your lender offers a float-down option. Even if you do have a float-down option, you’ll want to consider the cost of exercising that option and any restrictions on when you’re allowed to float down your rate.

Also, keep in mind that if you lock in your interest rate but float your points, you could be charged a higher number of points if rates go up by the time you close. You would then have to make a larger lump sum payment when you close on the loan. Before entering into this type of agreement with a lender, think about whether you would still be able to afford the loan if it turns out you have to pay more upfront.

What’s next: How do I know I’m getting a good rate?

You can usually get a good idea of whether you’re getting a great mortgage rate for you if you compare offers from several lenders. Getting a loan estimate typically costs around $20 or less per lender — not bad considering how much that info can help you make an informed decision. Asking multiple lenders for loan estimates won’t count as multiple inquiries on your credit scores as long as you get all the estimates within a short time period.

To get offers that are as accurate as possible, share any documentation you have, such as proof of income, with the lenders. It’s generally best to ask each lender about loans with the same down payments, terms, and other features so you can make relevant comparisons.

If you spot mistakes in any of your loan estimates, let the lender know. Even a small typo could result in a lender giving you an estimate that’s very different from the rate you would actually qualify for and related costs.

Once you have several estimates, look at them side by side to see which have the lowest interest rates.

It may also help to see how much you’ll pay in the first five years for each home loan. You can typically find this information on Page 3 of each loan estimate, in the Comparisons section.

About the author: Sarah Brodsky is a freelance writer covering personal finance and economics. She has a bachelor’s degree in economics from The University of Chicago. Sarah has written for companies such as Hcareers, Impactivate and K… Read more.