Mortgage interest rates have undergone dramatic changes in 2022, and they can even change multiple times a day, sometimes rising and falling. It is important to understand how a mortgage rate lock can protect you from the time you apply for your loan and the time you close on your home. It’s essential for potential buyers to be aware of everything that impacts the total cost of your loan—including interest rates.
A mortgage rate lock guarantees the rate on your mortgage stays the same from the time you are first quoted a rate to the time you close. With inflation, rising home costs, and rate changes by the Federal Reserve, mortgage interest rates have been rising and changing by the day. In a shifting market, the best thing you can do is be informed about the options you have to protect your buying power.
That’s why we asked three industry experts everything you need to know about mortgage rate locks. Every situation is different, and it’s best to reach out to a professional if you have questions about your unique circumstances.
What is a mortgage interest rate lock?
Mortgage interest rates are the rate of interest charged on a mortgage as determined by the lender. These can vary from fixed rates that stay the same for the length of your loan or variable rates that fluctuate alongside a benchmark interest rate. A rate lock freezes the rate of your mortgage interest rate from going higher before you get the chance to close on your home.
When can you lock in a mortgage rate?
You can decide to lock in your mortgage rate once you’re approved for a loan and you’ve decided on the lender you want to go with. According to Max Leaman, Sr. Loan Officer of LoanPeople’s Leaman Team, it’s not just about the interest rate. In a market like Austin’s where homes tend to appreciate, you don’t want to wait to buy a home solely because you’re worried about rates. When you begin looking at loans, you’ll also want to take into account any fees that will impact the total cost as well as the level of service you’re getting.
Can I cancel a rate lock?
Part of the initial conversation once you have a property under contract about interest rate locks and secondary mortgages will be property specific. If you’re under contract on a home with a rate lock and something different comes up under the option period you can back out. But if you find another house and want to move forward with it, you can’t move the rate lock. If your initial lock was free, it usually does not cost you anything to cancel your lock. But, if you are canceling it to get a lower rate on the same property, you can delay your closing date.
What is a lock and shop program?
Some companies, like the Leaman Team, allow you to lock in an interest rate on a home loan before you find a specific property. These usually last from 60 to 90 days, meaning you don’t have to worry about rates going up while you continue to search for a home. It’s important to be aware that the lock could expire before you close, so you need to act fast and be aware of the extension options with your lender.
How long can you lock in a mortgage rate?
Many lenders offer short and/or long-term mortgage interest rate locks. Short-term mortgage interest rate locks can range from 20 to 90 days in length, while long-term rate locks are typically 90 to 360 days.
What are the pros of a mortgage rate lock?
As interest rates continue to rise, potential buyers may be wondering how they can protect themselves. According to Leaman, one main benefit of getting a rate lock is that you know what your interest rate is going to be and what it won’t exceed. Rate locks protect you in case interest rates go up before you close on your home, and they can potentially save you money over the length of your loan.
“The most important pro of locking a mortgage rate when interest is going up is that you will benefit from a lower interest rate on your mortgage, which will bring down the total cost of your mortgage. This is crucially important in order to make your home purchase as affordable as possible,” says Daniela Andreevska, Real Estate Expert and VP of Content at Mashvisor. "Another benefit is that having a locked mortgage gives buyers peace of mind and makes them worry less about this part of the stressful process of buying a home.”
What are the cons of a mortgage rate lock?
Andreevska says that one downside is the amount of time you have within the free mortgage lock, and notes that some lenders only offer 30 days for free. Even if you have to pay a fee, Andreevska says, “it is worth considering this option and comparing the fee to the increase in the interest rate which you expect in the next couple of months. In a dynamic situation paying the extra fee to lock a mortgage rate might be totally worth it.”
Another downside of a mortgage lock is that if rates go down, you might not be able to lower it to where the current market interest rate is. Even if this happens, according to Leaman, homebuyers have another option offered by some lenders called a float-down option.
What is a mortgage rate float-down option?
Buyers deciding whether or not to lock in their mortgage interest rate might be worried that they’ll be stuck with a higher interest rate if they get a mortgage lock. That isn’t necessarily the case. A variety of lenders have an option where even if a buyer has a rate lock, they can still get a lower rate from the lender if interest rates go down. Some lenders charge for this and some do not, so make sure to ask. According to Leaman, while they might not end up at the market rate, they’ll likely end up somewhere in the middle.
How do you decide between a short-term rate lock and a long-term rate lock?
You’ll want to look at the closing date to determine how much of a rate lock you would need. Additionally, if it is predicted that the market rate will climb, you might want to consider locking in your rate as soon as possible.
Troy Schleski from Highland Home Loans says, “Locking in a short-term or long-term mortgage interest rate depends on what a customer is looking to do. Whether they are purchasing a resale home with a short contract to closing date range, or a new construction home where a longer-term rate lock would be needed, the strategy is different for various scenarios.”
How much does a mortgage interest rate lock cost?
According to Schleski, for a rate lock of 90 days or less, there is typically no upfront cost or deposit. For a longer-term rate lock of 120 to 360 days, there could be an upfront deposit that will vary based on the length of the lock and the lender. Not all lenders offer long-term rate locks, and some may start charging at an earlier period, so be sure to ask this upfront when you are selecting an institution.
Will I be stuck with my mortgage rate for the life of the loan?
Leaman says, “ It's really important, especially in the environment that we're in right now, to realize that just because you're going close on a loan that has a 30-year fixed rate, or 15-year fixed rate, that does not mean that is going to be your interest rate for the life of your loan. There's going to be plenty of opportunities to refinance within the next couple of years.” Refinancing means you’re replacing your old home loan with a new one, typically for the purpose of getting a lower interest rate. You pay off your old loan with the new one, so you just have one monthly payment. This is an option to keep in mind if rates drop in the future.
What will happen with mortgage interest rates for the rest of this year?
Experts at Realtor.com anticipate that home prices and mortgage rates will both continue to rise throughout the year, meaning that waiting to buy could cost you more. That said, it’s impossible to predict where they are going to end up, and they are constantly changing. Locking in your rate can give you control over these changes.
Pro-Tip: “Regardless of whether you decide to lock the rate or not, you should shop around and talk to a few different lenders, including both big national banks and small local banks,” says Andreevska. “Each lender offers slightly different terms and conditions, and since buying a house is likely to be one of the most expensive purchases in your lifetime, it's worth spending some extra time to get the best possible deal. Small differences in the terms might end up to a lot over the course of the entire mortgage period.”
Whether you’re looking to buy a new or existing home, having a trusted real estate agent and lender on your side will make all the difference in today’s market. Your real estate agent can keep you informed on important market insights and changes and have an open communication stream between you and your lender.
Disclaimer: This information does not constitute loan advice. Reach out to a mortgage professional for advice about your unique situation.