How Mortgage Rate Locks Work

house keyWhen you apply for a mortgage, your lender will offer what’s known as a rate lock (sometimes called a lock-in) in which they promise to hold your quoted interest rate for a specified period of time. Mortgage rate locks are beneficial because as interest rates can change from day to day, a mortgage applicant with a rate lock can rest assured that the rate they were quoted will remain available for them for a certain period of time.

How long do mortgage rate locks last?

Rate locks are intended to keep your interest rate and points from changing during the time it takes for your loan applocation to be processed. However, it is important to understand that while rate locks can be negotiated, they are not indefinite. Your lender will discuss the specifics with you, but most mortgage rate locks will expire after a period of 15 to 60 days with the average time being 30 days.

The exact lock range can depend on several factors, but you as the applicant can request a specific lock time. For instance, in markets where loan processing is prolonged due to higher demand for housing, you may want to request a longer lock period.

When exactly does the mortgage rate lock begin?

In some cases, you can request to choose the specific point at which the rate locks. Some people choose to lock in as soon as they see a low rate that appeals to them. This is pretty common during times when mortgage rates are trending higher. Other people choose to wait a little while longer and lock in the rate upon their home loan’s approval.

In the example mentioned above, where the market is experiencing heavy demand, the applicant may want to request to have the lock activate upon the loan’s approval in order to avoid a situation where the lock expires before the loan is fully processed. Locking in upon approval may also be a good idea if mortgage rates are trending down.

What happens if interest rates fall after I’ve locked in?

A mortgage rate lock contract will spell out the many specifics and certain options available to you in different scenarios, but a common question from borrowers is, “what happens if rates drop after I’ve locked in?” If this happens, you may be eligible for what’s called a rate float-down. This is essentially an option that allows the borrower to get the lower rate instead of the rate they’ve locked in.

Keep in mind that you will not be able to use the float-down option unless your original lock contract includes a float-down provision. Be sure this is included in writing – do not assume that a verbal agreement will be adhered to. Furthermore, you will most likely need to inform your lender that you want to use the float-down feature – it may not occur automatically when rates drop.

If you do not have a float-down provision in your rate lock contract, you may still be able to take advantage of the lower interest rate; however, you will most likely need to have your lender rewrite the rate lock at an additional cost.

If you have any questions about locking in a mortgage rate, feel free to discuss them with your lender.

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