Mortgage Rate Locks: How They Work and When to Lock Your Rate

Would you step over a dollar to pick up a penny or two? Most people would say, “No, of course I wouldn’t.”

But that’s exactly what can happen when people get too worried about when to lock in the rate on their new mortgage loan.

I’ve seen this happen many times. A borrower is not quite happy with locking even when today’s rates are lower than yesterday’s. So they decide to wait until next week to see if rates will go down by 0.125 percent more.

This doesn’t always end well. Often, the borrower has to take a higher rate than the one they could have locked in the week before.

What Does a Rate Lock Do?

It’s a myth that borrowers lock in a single rate. In reality, borrowers lock a rate chart. At least once every business day lenders get a new chart with that day’s rates.

For example, let’s say a borrower with a credit score of 690 is refinancing their $127,500 loan balance over a new 30-year fixed-rate loan.

This example rate sheet might be available to lock in for this borrower:

Let’s say the borrower decides to lock in this rate chart. This borrower has now committed to a rate that falls somewhere on this chart. Where on the chart this new loan’s rate lands depends on how much money this borrower spends on discount points or receives in the lender credits.

This borrower wants to spend $400 on discount points, paid to the lender at closing (option 4). Doing this locks in a rate of 7.125 percent and a monthly principal and interest payment of $858.99.

But, a week after locking, this borrower realizes they need more help with closing costs. So they switched to option 1 on the locked rate sheet. With this option, the borrower receives $1,195 in lender credits (instead of paying $400 in discount points). This caused the loan’s rate to increase to 7.5 percent and its P&I payment to go up to $891.50.

As you can see, locking in a rate chart still leaves options on the table.

What is the Best Time to Lock a Mortgage Rate?

Overall, I’m a big proponent of taking advantage of what you already have, right now, instead of trying to save a few dollars tomorrow.

Take the example above. Let’s say this borrower heard rates might go down and decided to wait until next week before locking. They waited, and then the new rate chart looked like this:

If you look closely you’ll see the best four rates from the first chart, above, have fallen off the board. They’ve been replaced by four higher rates. What stayed the same is the cost of the discount points (or the value of the lender credits) needed to lock in the rates.

You could envision this as a slot machine. The first two columns stay the same, but the rate moves around each day. As the rate changes, so does the principal and interest payment.

In the first rate chart, the borrower could have locked in a rate of 7.5 percent and a payment of $891.50 while receiving $1,195 in lender credits. Now, a rate of 7.5 percent on the same loan means the borrower has to pay $878 in discount points to get that rate.

That’s a difference of $2,073 in cash due upfront!

Or, to continue receiving the needed $1,195 in lender credits (option 1), this borrower will now have to accept a rate of 8.0 percent and a P&I payment of $935.55 a month. If the borrower kept that loan all 30 years, this would rack up $16,200 in extra interest charges.

This exact scenario happened to a real life client earlier this year, except the loan size was much larger which made the expense even bigger. He wound up having to bring $5,000 more to closing to get the same rate he could have locked in a week earlier.

How to Decide When to Lock

Of course, the opposite can, and does, happen. Sometimes the next day’s rate charts come in lower than today’s options, which is why it’s so enticing to wait. But the market is hard to predict, and the rewards that can result from a lower rate can be small compared to the potential risk of waiting.

People like to make predictions. People like to track the market and anticipate what will happen next. People like to talk about the Fed. They want to wait until the Fed meets to see if they lower rates any.

Now of course, it’s true that the Federal Reserve’s decisions about benchmark rates affect mortgage rate charts lenders use. But that doesn’t mean someone who’s buying a house should wait 10 weeks until the Fed’s next meeting.

In reality, the Fed meets all the time and makes all sorts of financial decisions, most of which never make headlines. And other factors, like demand for mortgages, Treasury bond yields, and slight changes in other markets, affect mortgage rates every day.

Because of this, mortgage rates are in constant flux. Unless there’s some huge economic event on the horizon, mortgage borrowers should lock in a good rate sheet without overanalyzing it.

‘Date the Rate, Marry the House’

I remind borrowers of this a lot. Buying the right house is the point of mortgage borrowing. The rate matters, too, but it’s not the purpose of the loan.

For most people, the house will be more permanent than the rate. The mortgage rate can be changed with a refinance later, if market conditions change significantly. Or the borrower might pay off the loan a lot faster than they expected.

This means people shouldn’t stress about getting the lowest possible rate. The days of three percent mortgage rates aren’t coming back, hopefully. It took a global pandemic to get rates that low last time, but that caused more harm than good. That was not normal.

How Long Do Rate Locks Last?

Typically we lock rates for 30 days, but lenders can also lock in rates for 15-, 45-, and 60-day periods. Thirty days is usually enough time to get a loan closed, especially when the applicant responds quickly to loan officer requests.

Lenders can also extend a 30-day rate lock for 15 more days if needed.

Rate locks cost the borrower money, and the rate lock fee is typically non-refundable, even if the loan doesn’t close, so getting the timing right matters.

Longer locks cost more than shorter locks because they put the lender at a higher risk of losing money, so it doesn’t make sense to pay more to lock for 60 days unless there’s a good reason.

If a rate lock is allowed to expire before the loan closes, the lender has to wait 30 more days before locking a new rate on the same loan. If a lock is nearing its expiration date and the loan isn’t going to close, I’ll reach out to the borrower about a rate lock extension.

What If You Lock And Rates Go Down?

This happens sometimes. Like I said above, mortgage rates change every day. Sometimes they change more than once a day. It’s possible for available rates to go down after the rate gets locked.

When this happens, and someone experiences rate remorse, I might give my advice about how you date the rate but marry the house. In other words, it’s all about perspective.

In most cases, the rate might go down an eighth of a percent (0.125%). Here’s what that means for someone buying a $300,000 home with $25,000 down.

• A rate of 7.875 percent requires a payment of $1,994 (principal and interest)

• Lowering the rate to 7.75 lowers the payment to $1,970 (principal and interest)

That’s a savings of $24 a month. When you’re spending $300,000 and parting with $25,000 in cash — plus about $10,000 to $15,000 in closing costs — tearing everything up to save $24 a month doesn’t make all that much sense.

Now I know that if the borrower kept paying $24 a month for 30 years, that would add up to over $8,000. But most people don’t keep 30 year loans beyond the first decade.

Can You Unlock the Rate or ‘Float Down’ the Rate?

The rate lock is a binding contract between the lender and the borrower. It’s not an imaginary or abstract feature that the lender could change on a whim. The locked rate is the glue that holds the mortgage loan together. That’s one reason Loan Estimates prominently display whether the rate is locked.

So the rate can’t be unlocked. I remind borrowers that it works both ways. The lender also won’t unlock the rate if rates go up. The lender will honor the locked rate even if rates go 2% higher before the loan closes.

Many lenders do offer “float down” options. With these, the locked rate can float down if market rates fall far enough to trigger the float-down clause. These locks cost more, and in my experience they’re typically not needed.

If rates plummeted to the point that the borrower would save a fortune by abandoning their locked rate, something would have gone badly wrong with the overall economy. At that point, the buyer would likely be reconsidering whether they should buy the house at all.

How Much Do Rate Locks Cost?

It costs the lender money to lock in a rate sheet. The lender passes this fee along to the borrower. Even if it’s not listed as a line item on the Loan Estimate, the lock fee gets passed on through origination, processing, or underwriting fees.

This rate lock fee is typically assessed as a percentage of the loan amount. A common 30-day rate lock fee of 0.25 percent, on a $300,000 loan, would cost the borrower $750.

Longer rate locks charge higher fees. Locks with float-down options cost more, too. If the lock fee were 0.4 percent on a $300,000 loan, the fee would total $1,200.

Construction loans may need a 60-day rate lock since construction delays happen, but a 30-day lock is typically long enough for most borrowers in today’s market. In times of unusually high demand for refinances, like we experienced during the pandemic, 45- or even 60-day locks might be needed.

Timing the Rate Lock: Much Ado About Nothing?

I know people care about getting the lowest possible mortgage rate. I work with borrowers every day. I get it. I won’t say it doesn’t matter.

But in my experience, worrying too much about when to lock can distract buyers from things that matter more like comparing Loan Estimates from different lenders and making sure the house gets property inspected and repaired before closing day.

Buying a house should be life changing. Deciding whether to lock the mortgage rate today or the day after tomorrow shouldn’t be.