Mortgage Rate Lock: Definition, How It Works, Periods, and Fees

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Updated February 12, 2024
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What Is a Mortgage Rate Lock?

A mortgage rate lock is an agreement between a borrower and a lender that allows the borrower to lock in the interest rate on a mortgage for a specified time period at the prevailing market interest rate. A loan lock provides the borrower with protection against a rise in interest rates during the lock period.

The lender may charge a lock fee, which the borrower must pay if they do not lock the interest rate. Alternatively, the lender may charge a marginally higher interest rate to begin with, just in case the borrower chooses not to lock the interest rate.

Key Takeaways

  • A mortgage rate lock guarantees the current rate of interest on a home loan through the purchase and closing process.
  • A rate lock protects you from the potential of rising interest rates during the home buying process.
  • Some rate locks will also grant a float-down provision that will allow you to take advantage of lower rates in the market.
  • A rate lock period will typically be 30 to 60 days.

Explaining a Mortgage Rate Lock

When a borrower locks in an interest rate on a mortgage, it is binding for both the borrower and the mortgage lender. The interest rate is locked for the period from the offer of the loan to its closing. The rate will stay consistent, regardless of market changes, as long as there are no changes to the application for the loan during the closing period.

If there is new or corrected information on your income or credit score, or if the loan amount changes, the mortgage interest rate could be affected regardless. Furthermore, if you change the type of mortgage you are seeking or if the appraisal of the home is lower or higher than anticipated, the interest rate may change.

If rates go down, you may have the option to withdraw from the agreement. The probability of such a withdrawal is known as a fallout risk for the lender. You ensure that the lock agreement allows for withdrawal.

In cases where prevailing rates decline during the lock period, you may have the option to take advantage of a float-down provision to lock in a new, lower rate. As with any feature that increases interest-rate risk to the lender, a float-down provision generally entails an additional cost.

Mortgage locks generally last for 30 to 60 days. At a minimum they should cover the period necessary for the lender to process your loan application. An example of a short lock period is one that expires shortly after completion of the loan-approval process. In some cases this lock period can be as short as a few days.

You can negotiate the terms of a loan lock and often extend the term of the lock for a fee or slightly higher rate.

Risks of Taking on a Mortgage Rate Lock

A downside, for the borrower, is a mortgage rate lock would prevent them from taking advantage of lower rates that may occur during the lock period. Conversely the lender cannot take advantage of rises in interest rates.

Some borrowers walk away from the agreement if interest rates fall. And unscrupulous lenders have been known to let lock periods expire if interest rates rise under the excuse that the borrower could not process the necessary paperwork in time.

A lock deposit requirement indicates that both the borrower and the lender intend to keep the agreement. A rate lock may be issued in conjunction with a loan estimate.

A mortgage rate lock period could be an interval of 10, 30, 45, or 60 days. If the period is longer, you may have a higher interest rate. Essentially the rate lock would be lower on shorter intervals till the close because there is less risk of fluctuation in the market. If the lock period expires and the mortgage has not closed, it may be possible to request an extension to the rate lock.

If an extension is not granted, then the mortgage will be subject to the going market rates.

Even with a rate lock and a mortgage rate lock float down, it is possible to end up paying a higher interest rate than the rate that you agreed to when you signed for the lock. This occurs because many lenders include a "cap" with the lock agreement. The cap permits the guaranteed rate to rise if interest rates rise before settlement. Because the cap sets a limit on the amount the rate can rise, it does provide some protection against rising interest rates.

What if I Lock in a Rate and it Goes Down?

If you lock in a rate, you can only take advantage of a lower interest rate if you have a float down provision that allows you take the lower of the two interest rates. Otherwise, you will have to take the rate you locked in with the lender or withdraw from the agreement.

How Do You Include a Float Down Provision in a Rate Lock?

You can include a float down provision when you lock-in a mortgage rate by paying any associated fees with this benefit. The fee will vary by lender but can be up to about 1% of the loan.

Can You Negotiate Your Loan Terms at Closing?

You can negotiate the terms of your loan until you officially close the loan by signing the documents. You can also negotiate the costs of the mortgage up until that point. Keep in mind lenders are not obliged to make changes to the agreed-upon terms.

Bottom Line

A mortgage rate lock can be valuable in a mortgage application process, especially when interest rates are rising. With this feature, you can secure one interest rate for your loan even if interest rates increase with broader market trends before your mortgage closes. Consider the current interest market rate trends and your financial situation to determine if a mortgage rate lock is right for you.

Article Sources
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  1. Consumer Financial Protection Bureau. "What's a Lock-in or a Rate Lock on a Mortgage?"

  2. Nasdaq. "Fallout Risk."

  3. Consumer Financial Protection Bureau. "Am I Allowed to Negotiate the Terms and Cost of My Mortgage?"

  4. Rocket Mortgage. "Float-Down Option: Can It Lower Your Mortgage Rate?."