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.
What Is a Mortgage Rate Lock?
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.
Why Mortgage Rates Fluctuate
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.
How Long Do Mortgage Rate Locks Last?
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.
Pros and Cons of Mortgage Rate Locks
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.
Protection Against Rate Increases. A mortgage rate lock provides security against unexpected hikes in interest rates, which could save you a significant amount in the long run.
Missed Rate Drops. Once your rate is locked, you won't benefit from any potential rate reductions that may occur.
Budgeting Certainty. Knowing your interest rate upfront can help you establish a solid budget, providing a clear idea of your future mortgage payments.
Rate Lock Expiration. If your closing process gets delayed beyond the lock period, you could risk losing your secured rate, possibly incurring additional fees to extend the lock.
Rate Fluctuation Insulation. With a rate lock, you are shielded from the day-to-day volatility of mortgage rates, creating a stable environment for your home buying process.
Non-Transferable Locks. If you decide to switch lenders, your rate lock typically can't be transferred, meaning you'll have to negotiate a new rate.
Peace of Mind. Eliminating the worry about rising interest rates can offer mental and emotional relief, making the home buying experience less stressful.
Loan Term Modifications. If you need to change your loan's terms, it might result in losing the locked rate.
Secure Planning. Having a guaranteed rate can simplify the financial planning aspects of home buying, allowing for better focus on other important aspects of the process.
Rate Lock Fees. Some lenders may charge a fee for the rate lock service, especially for extended rate locks.
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.
When Should You Lock In Your Mortgage Rate?
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.
How a Secure a Mortgage Rate Lock for Your Loan
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:
Assess Your Financial Situation
Make sure you have a solid grasp of your current financial situation before starting the process. That includes knowing your credit score, budget and down payment size.
Consider Various Lenders
Don't settle with your first lender — take time to explore multiple lending institutions. Different lenders can offer different rates and lock-in terms. Some may offer a lower rate but charge higher fees for it.
Once you've chosen a lender, discuss the terms of the mortgage rate lock, including the interest rate, mortgage points and the length of the lock period. Remember, a longer lock period can be more expensive.
Gather Required Documents
When you’ve worked out the details, provide your lender with the necessary documents to process the rate lock. These usually include proof of income, your credit report and details of the property you intend to purchase.
Review Your Lock Agreement
Your lender will provide a lock agreement, which shows the interest rate, points and how long the rate is locked for. Ensure you understand all the terms before signing.
Keep track of your loan's progress to ensure it stays within the lock period. Delays can happen, and you might need to extend the lock period, which may translate to additional fees.
Close Before Expiry
Be sure to close the deal before your lock period expires, otherwise you might be subjected to current market rates, which could be higher.
Securing a mortgage rate lock requires careful planning, clear communication with your lender and a close eye on the home buying timeline.
Frequently Asked Questions
Here are some commonly asked questions about mortgage rate locks to provide you with additional information about the process.
About Christopher Boston
- FRED Economic Data. "15-Year Fixed Rate Mortgage Average in the United States." Accessed July 27, 2023.
- FRED Economic Data. "30-Year Fixed Rate Mortgage Average in the United States." Accessed July 27, 2023.