What Is A Mortgage Rate Lock and When You Should Do it

Unlike other loans, a mortgage is specifically designed for the purchase of a home. One important component of a mortgage is the interest rate, and knowing how to leverage a mortgage rate lock — which offers protection against interest rate fluctuations — can help you secure more favorable terms during the mortgage process.

A mortgage rate lock is a lender's commitment to hold a specific interest rate for a homebuyer for a predefined period while their loan application is processed. A rate lock protects you from potential increases in interest rates before you can close on your mortgage.

For example, as of late July 2023, the average rate for 15-year fixed-rate mortgages stands at about 6%, an increase from 4.58% at this time last year. For 30-year fixed-rate mortgages, the average rate went from 5.3% to 6.78% within 12 months. This highlights how mortgage rates can fluctuate over time, and a mortgage rate lock ensures that you're protected against such rate increases for a short period. When utilized effectively, a mortgage rate lock can contribute to a positive homebuying experience.

When interest rates rise, the cost of borrowing increases. That translates to higher monthly mortgage payments, which affects your budget and long-term financial plans. Understanding the factors behind these changes can help you anticipate shifts in the market and make informed decisions to find the best mortgage deals. The main factors affecting mortgage rate fluctuations include the following:

• Market and Economic Factors: Economic conditions, such as inflation, unemployment rates and economic growth, directly impact mortgage rates. Mortgage rates usually rise in a strong economy, reflecting the higher borrowing costs associated with economic growth.

• Federal Reserve Policy: When the Federal Reserve raises or lowers the Federal Funds Rate, it leads to similar movements in short-term interest rates. For example, when the Fed increases the Federal Funds Rate to address inflation, mortgage rates typically increase, making purchasing a home more expensive.

• Bond Market Movements: Mortgage rates often move in tandem with the yield on U.S. Treasury bonds because both are long-term investments. Investors can get higher returns on bonds when bond yields rise, so mortgage lenders offer higher interest rates to compete. When bond yields drop, the potential return on mortgages becomes more attractive, allowing lenders to lower rates.

• Supply and Demand: The dynamics of supply and demand in the housing market can influence mortgage rates. More demand can lead to higher rates, while increased supply (more lenders offering mortgages) can push rates down.

• Credit Scores and Risk: Credit scores are a measure of a borrower's creditworthiness based on their history of debt repayment. A higher score indicates you’ve managed your debt well, suggesting you’re less likely to default on your mortgage. Borrowers that lenders view as less risky often get lower rates.

Securing a mortgage rate lock can be a smart move, but it doesn’t mean your lender holds onto your preferred mortgage rate indefinitely. Most will lock a rate for 30 to 60 days, allowing you to proceed with the homebuying process without worrying about rate fluctuations.

However, you might need more time if you’re building a home or purchasing one that's not quite move-in ready. In these situations, you can consider an extended rate lock, which some lenders offer. It provides the possibility of stretching your rate lock period to 90 days, 120 days or even longer.

You may have to pay a fee for an extended rate lock, which varies between lenders and depends on the extension’s duration. You may be able roll it into your mortgage costs, but it's best to clarify with your lender.

A mortgage rate lock is an option — you don’t need to get one if you don’t think it’ll benefit your situation. It’s best to consider the following points to determine whether securing a mortgage rate lock is in your best interest.

Take the time to reflect on your financial circumstances, the current market trends and your long-term goals before deciding whether a rate lock is right for you.

In general, most lenders won't allow you to lock in your rate before you've signed a purchase agreement, unless they offer a “Lock-and-Shop” option. This option enables you to begin house hunting with your rate already locked.

In most cases, however, you'll have the ability to lock your rate once your offer is made and accepted on a house. With a more defined timeline for closing, this is an excellent point to lock in a mortgage rate because you’ll have a more accurate estimate of your rate lock’s duration.

If you decide not to lock in your rate earlier, you'll need to do so at least a few days before closing (exact timeframes will depend on the lender) so that the lender can finalize the details of your loan. Determining when to lock in your mortgage rate requires a good understanding of your home buying timeline, market trends and risk tolerance. Don’t hesitate to consult with your lender if you have doubts — they can provide you insights that could clarify your choice.

When you’ve weighed your options and determined when you'd like to secure a mortgage rate lock, follow these steps to move forward with the process:

Securing a mortgage rate lock requires careful planning, clear communication with your lender and a close eye on the home buying timeline.

Here are some commonly asked questions about mortgage rate locks to provide you with additional information about the process.