Mortgage Interest Rate Locks: A Homebuyer’s Guide

There’s no question that mortgage interest rates have gone through some wild times lately. 

You only have to look back at early 2021 ─ when a 30-year fixed-rate mortgage could be had for well under 3% ─ to realize that the current interest rates (which are hovering around 8% as of this writing) mean a big difference in buying power and price. 

However, it bears remembering that mortgage rates have been much higher in the past – and they could be again. Mortgage interest rates in October 1981, when inflation in the United States was arguably much worse, hit an mind-blowing 18.63%. That gives you an idea of just how rapidly – and profoundly – the situation can change. 

Since nobody really knows what the Federal Reserve will do next and how that will ultimately affect mortgage rates tomorrow, prospective homebuyers need to be savvy. Obtaining a mortgage rate lock can help.

What Is a Mortgage Rate Lock?

At its core, a mortgage rate lock is an agreement between a lender and a borrower in which the lender guarantees the borrower a certain interest rate so long as a home purchase is completed within a set time. With a mortgage rate lock in place, the mortgage you end up with won’t change and become an unwelcome surprise. 

In a moving financial market where interest rates can fluctuate wildly, a rate lock gives prospective homebuyers a safeguard against potential interest rate increases. If you are in the market for a home right now, a rate lock also offers a sense of stability as you move forward with your home purchase. 

This can be critically important. Not only does even a marginally lower interest rate have the potential to save you hundreds of dollars each year, but it also saves you thousands throughout the life of the loan. 

A mortgage rate lock can also make it easier to get a loan approved in the first place. Because the interest rate on your loan affects your monthly payment, a higher interest rate increases your prospective debt-to-income ratio. If that gets too high, your loan can be abruptly denied.

How Does a Mortgage Rate Lock Work?

The mechanism behind a mortgage rate lock is relatively straightforward. When a borrower initiates the mortgage application process, the interest rate is subject to market conditions. These conditions include economic factors, inflation rates and the lender’s own policies. 

Typically, you can lock your interest rate down as soon as you have accepted a purchase contract, submitted your loan application, had your credit checked by the lender and received a loan estimate. 

Before signing on the dotted line, however, it is important to understand a few things about mortgage rate locks:

• Mortgage rate locks are not perpetual guarantees. They come with an expiration date, usually ranging from 30 to 60 days, though some lenders may offer shorter or longer lock-in periods. Borrowers must be aware of this timeframe and ensure that their purchase closes before the lock expires to avoid potential complications and extra costs.
• Mortgage rate locks are not always free. There can be fees associated with a lock, and they typically must be paid upfront or shortly thereafter (although they may sometimes be rolled into your closing costs). The more volatile the market conditions, the more likely a lender is to require payment.
• You’re taking a gamble that interest rates won’t drop. If the interest rates go down during the wait between your purchase agreement and closing, you won’t necessarily benefit automatically. If you’re concerned that may happen, you need to find out if your lender will grant you a “float down” option that you can use if the rates do fall. (Just be aware that there are usually limits to these, meaning that the rate has to fall by at least a quarter or half of a percent or more to qualify.)

Once you decide to lock in a rate, request written confirmation from your lender. This document should explicitly outline the agreed-upon interest rate, the duration of the rate lock and any associated terms or conditions. Review the locked-in estimate of your loan to make sure that there’s nothing you aren’t expecting with the rate, the closing costs and your payment. Also make note of the lock’s expiration date, since that tells you how long the guarantee is good.

Once the Rate Is Locked, What Can Go Wrong?

Even with an interest rate lock, you have to be careful that you don’t accidentally create any kind of problem for yourself. You can lose that locked-in rate when:

• Your credit rate changes. If your score goes up, that’s probably not a problem. If your score dips because you put a few housewarming items or moving expenses on your credit cards, that could cause your interest rate to change.
• There’s a value discrepancy with the house. Appraisal gaps are always tricky to navigate, and a lower than anticipated appraisal could spell trouble for your entire purchase, not just the interest rate.
• Your debt-to-income ratio changes. Your DTI is one of the most critical factors that gets evaluated when you apply for a mortgage. That’s because the banks use homebuyers’ DTI rates to determine if they can truly afford a monthly payment. If your DTI changes drastically, that could change the whole loan agreement.
• You miss the expiration date. Things happen. A missing or unsigned document or a sudden question about some of your documentation could delay the underwriting process and push you past the rate lock’s time limits. If that happens, you may be able to pay for a rate lock extension, but it depends on the lender.

Knowing that your interest rate is locked in offers you peace of mind. This stability facilitates better budgeting and financial planning, allowing you to confidently move forward with your home purchase without the worry of rising interest rates. To learn more, talk to your mortgage expert today about the possibilities.