Loan Locks / Locking in an Interest Rate
With a rate lock, or loan lock, the lender is obligated to provide a mortgage at the agreed-upon rate, regardless of any changes in mortgage rates between loan approval and the closing data. If interest rates increase before you are ready to close, you will pay the lower rate.
Locking in an interest rate is important if you want to get the best deal on your mortgage. When you shop around for a loan, you may be tempted to hold off if the market is moving downward, believing that you can hold off long enough to get a better rate. If you decide not to get a loan lock and rates go up, you will have no protection.
If you do not use a rate lock when you buy a home or refinance, you will be at the mercy of changes in the mortgage market while your loan is processed. This means a 5.0% rate can turn into a 5.5% rate before closing.
A higher interest rate can increase other loan costs, and it may force you to pay more points or put more money down to keep your monthly mortgage payment affordable.
What Happens if Rates Change After a Rate Lock?
If interest rates go up during your lock-in period, you will not be affected and you will still pay the lower rate you locked in to receive. If rates go down, you will most likely not be able to take advantage of the lower rates, instead paying the higher rate you agreed too.
There are a few exceptions to this rule. If you have a "float down" provision -- which states that if rates go down during your loan lock period, you can pay a lock renegotiation fee to take advantage of the lower rate in . The lock renegotiation fee to lock the new lower rate can be costly (up to 50 basis points or 0.5%), so it must make sense from a financial standpoint depending on your estimated loan holding period.
When Should You Lock in Your Interest Rate?
For most borrowers, it is best to sign a purchase agreement on a specific property before getting a rate lock. Then, you may find a mortgage product with a good interest rate and ask your lender to lock in your rate in writing.
You do not want to lock in your rate too early, as rate locks are typically only good for a few weeks to two months, so your rate lock can expire if your loan doesn't process fast enough.
Does it Cost Money to Get a Loan Lock?
This depends on the lender, as sometimes a rate lock will cost money, and sometimes it will not. The fee may be flat-rate, a percentage of the mortgage amount or added into the interest rate you lock into. These fees may or may not be refundable as well. Short-term rate locks of less than 60 days are usually free or cost around 0.25 to 0.50 percent of the loan amount. Lenders usually charge more for a longer-term rate lock on a loan.
