Mortgage Rate Lock: What It Is & Why It's Important

Mortgage Rate Lock: What It Is & Why It's Important

Written by Jeanette Arnholt
Article • 12/21/2021 • 10 minute read

Mortgage Rate Lock: What It Is & Why It's Important

There is perhaps no greater financial investment that you’ll make in your lifetime besides buying a new home. And while making monthly mortgage payments is meant to be accessible for the life of the loan, there are times when you may want (or need) to lower your rates and decrease your monthly payments.

However, it can be hard to find a refinance mortgage that works for you when interest rates are constantly changing. And this frequent fluctuation in interest rates can impact the amount of money you pay when you do end up finding a new mortgage.

With that said, a mortgage rate lock period can help protect you from those changes and freeze the interest rate while you work on closing the refinance, which helps protect you from paying more than you have to.

Here’s everything you need to know about mortgage rate locks, as well as why they’re important and when you should use them to give you peace of mind.


What Is a Mortgage Rate Lock?

Mortgage loan rates change daily, even hourly. Since that’s the case, you may run into a situation where a lender offers you a certain interest rate at the time of your offer, only for that interest rate to change by the time you reach closing. Since the closing process can take weeks, this can put homebuyers in a tricky, risky situation.

A mortgage rate lock, or lock-in, means that your interest rate will not change between the offer and closing.

In other words, whatever the lender tells you your interest rate on the loan amount is during the initial offer is “locked in,” even if external factors would have otherwise altered that price.


How Do Mortgage Rate Locks Work?

When you lock in your mortgage rate, it lasts for a certain period of time. The lock period varies depending on the type of loan, where you live, and your specific lender. If a rate lock expires before you close the loan, you can typically extend it for a fee.

Most lock-in periods last anywhere from 15 to 60 days. During that period, the interest rate that was offered originally will not change unless there are changes to your financial situation in which the lender would consider the rate lock void.

Typically, these are things like drastic changes to your income or credit score during the lock-in period.


Pros and Cons of Mortgage Rate Locks

The major benefit of a mortgage rate lock is that there are no surprises -- whatever the lender offers you as far as interest is what you’ll get at the time of closing. This can help prevent a frustrating increase in rate during the closing period, which can take weeks.

This is also part of the downside. Since the rate is locked in, if market conditions change and you would have been able to get a lower interest rate in due time, you’re now locked into the higher rate. Additionally, if you need to extend your mortgage rate lock, it can be a costly fee.


Should You Lock In Your Interest Rate?

Locking in your mortgage rate is not a requirement when you finance your home, but it might be able to help you out. If you’re happy with the mortgage rates at the time of closing and you don’t think they’d go any lower, locking them in is a good idea.

Additionally, locking in your rate gives you financial security to know what you’ll be paying each month. If you like to budget and think ahead, mortgage locking is the right move for you.

With that said, do your research beforehand to find out how mortgage rates have been acting. If trends indicate that rates are going up, you’ll want to lock in the rate. But if it seems like you may be able to get a lower rate, it might be wise to “float” your rate by not locking it in.

You should also keep in mind that almost all mortgage locks come with a lock deposit, a flat fee that you’ll pay in order to lock in your rate. This fee is credited back to you once the mortgage funds, but you won't get that money back if you decide to walk away before closing, you won’t get that money back. You can think of it as an incentive for the lender to persuade you not to look for lower rates elsewhere.

No one can predict the external factors that influence your mortgage rates, so it’s a bit of a gamble either way. But there are a few conditions you can be on the lookout for before making your final decision.


Factors Affecting Mortgage Rates

Mortgage rates are continually changing based on several economic and external factors. While you as the buyer are definitely looking to snag the lowest interest rates possible, the lender is in the business of minimizing their risk by offering higher interest rates whenever they can.

This balance gets struck based on a few different criteria, causing mortgage rates to change weekly, daily, and even hourly.


Economic Growth

Economic indicators like unemployment rates, gross domestic product, and other financial motivators can influence mortgage rates. For instance, when most of the country is gaining higher wages and increased spending, it usually means that interest rates rise to follow suit.

And while slowing economies often spark lower interest rates, individuals also tend to have less cash on hand to make such an investment.


Inflation

Inflation changes the value of a dollar over time, and it’s an extremely critical factor for mortgage lenders when naming their mortgage rates. Mortgage lenders often need to adjust their mortgage rates according to the rate of inflation to ensure that they’re overcoming the “erosion” of the dollar value. When inflation rates increase, generally, so do mortgage rates.


Federal Funds Rate

This is the rate at which banks, credit unions, and other financial institutions borrow money. This is controlled by the Federal Reserve, and this has a major influence on mortgage rates.

Typically, increases in the money supply from the Federal Reserve help to lower interest rates.


Housing Market Conditions

The trends within the housing market are also a major contributor in dictating current mortgage interest rates. If fewer homes are being constructed, then fewer people are able to buy new homes. This pushes interest rates down in an attempt to draw new home buyers or refinancers.

However, the opposite occurs if a market is full of potential buyers despite a low amount of supply to meet the demand. Interest rates will often increase in this situation, as lenders understand individuals may be willing to pay more if they’re in need of buying a new home.

The COVID-19 pandemic has played an interesting role in this factor, and it’s led many to believe that high unemployment rates will lead to a housing bubble and crash. While mortgage rates have increased due to high demand for new homes, a crash is not likely due to the fact that most individuals buying new homes are financially stable enough to pay off their mortgages.


What If Interest Rates Fall During the Lock Period?

When you lock in your mortgage rate, you run the risk of missing out on lower rates if you had allowed the rates to float.

If this happens, you may be eligible for something called a float-down provision in which you can lock in a new, lower rate. The problem is that this will coincide with an additional fee from you to the lender.

Additionally, you may also have the opportunity to withdraw from the original agreement. Just make sure this is something that you’re able to do under the confines of the lock-in contract, as many lenders will lock you in once you decide to go for locked-in rates.


Alternatives to Mortgage Rate Locks

Most borrowers will seek a lock-in mortgage rate in order to have financial security and hold onto low-interest rates over time. But there are other ways that you can keep a low-interest rate or avoid stark increases in interest without the risks associated with these types of mortgages.


Speed Up Closing

Closing on a home is an involved, time-consuming process that involves a number of steps from different third parties. For that reason, it can take weeks or even months between the initial offer and the final closing. That’s plenty of time for your initial rate to skyrocket due to external conditions.

You can minimize this risk by speeding up the time it takes to close. Network Capital does everything from intent to proceed to sign loan documents all under one roof. This means we can bring you to the closing table in as little as 15 business days. It’s simple, streamlined, and fast, and it can help avoid some of those hefty increases in mortgage rates.


Refinance

If you don’t decide to lock in your mortgage and rates heavily increase from intent to closing, you aren’t locked into those rates for the rest of your life. You can go through a home loan refinance to alleviate some of the financial burdens. With volatile markets and historically low interest rates, you should check out the rates today on www.NetworkCapital.com/rates.

Refinancing lets, you shop around to find lower interest rates from other lenders, allowing you to save money monthly. This is a great option if you’re thinking of living in your home for a long time and are looking to obtain smaller monthly payments.


Cut Out Closing Costs

Since the closing period is so involved, there are a number of individuals who you’ll need to pay before you can officially get the keys to your home. These closing costs are often thousands of dollars that you’ll need to pay upfront.

Looking for programs that waive certain closing fees and costs can help offset some of the money you’d pay if your mortgage rates increase between intent and closing. With that said, you can get a mortgage rate lock while simultaneously looking for ways to cut down on closing costs.


Float Down

If you’ve already locked in your mortgage rates, but you’ll otherwise be able to get a lower rate if you weren’t locked in, a float-down option may be available to you. Although this comes with a fee, it can save you hundreds in interest down the line.


In Conclusion

Mortgage rates are constantly changing every week, day, and even hour. Because of that, the original interest rate offer that a lender gives you may rise, or fall, between intent and the closing period. You can better budget your monthly payments and avoid an increase in interest rates with a mortgage lock.

These are periods of time, usually 15 to 60 days, where the interest rate is locked in and cannot change even due to external conditions like inflation, the housing market, economic growth, and more. For a small fee, you can extend the length of this period if it's taking a bit longer to close on your home than you anticipated.

Locking in your rate is a good idea if you suspect rates are going to rise soon, or if you want financial security. With that said, there’s a fee that you need to pay, which you’ll lose should you decide to walk away before closing. Not to mention, you may miss out on lower interest rates if you choose not to leave your rate “floating.”

You can eliminate some of the stress of changing mortgage rates by getting to the closing table faster or by finding lenders who offer competitive interest rates. Network Capital checks both of those boxes and more, offering $0 lender fees on loan programs that can get you to closing in as little as 15 business days. It’s all a part of our mission to help you finance the home of your dreams and live better.


Sources:
What's a lock-in or a rate lock on a mortgage? | Consumer Financial Protection Bureau
What Really Causes the Housing Bubble? | Northeastern Universityc
Closing Costs, a Primer | California Land Title Association