What Is a Mortgage Rate Lock?

One thing house hunting teaches you is that some things are out of your control. You can't control home prices, the amount of competition you'll have, or whether mortgage interest rates will change during your search. But actually, as a borrower, you do have the option to lock in a rate -- at a cost.

What is a mortgage rate lock?

A mortgage rate lock (sometimes called rate protection) is a tool that allows you to "lock" an interest rate in place for a set period -- typically 15 to 60 days. If your loan closing is postponed for any reason, you can usually extend the lock period for a fee.

Say you lock in a mortgage interest rate of 6.5% for 30 days, and after 20 days, rates spike to 7%, guess what? You're still entitled to your 6.5% rate, which will make your mortgage far more affordable in the long run. As such, a mortgage rate lock protects you from rising interest rates.

When should you request a mortgage rate lock?

Some mortgage lenders allow you to lock in rates as soon as your mortgage has been pre-approved, while others will not offer a mortgage lock until you present a purchase agreement to buy a home.

Unless rates are extraordinarily low, the best time to lock in a rate is after you've signed a purchase agreement, not the second your loan application is approved. That's because you want your lender to have more than enough time to process your loan before the rate lock period expires. Ask your lender how long it normally takes to get your home loan to closing and build in extra days for unforeseen circumstances -- that will help you determine how long your rate lock needs to be.

How much does a rate lock cost?

Many mortgage lenders do not charge for a basic mortgage rate lock. Some charge a rate lock fee, while others only charge if you need to extend your rate lock before it expires. Among those that do, you're typically looking at 0.25% to 0.50% of the total loan amount for a rate lock (of 60 days or less), and between 0.06% and 0.375% for an extension. That means if you borrow $300,000, it could cost between $750 and $1,500 for the initial lock, and $180 to $1,125 for an extension, payable as part of your closing costs. This isn't a negligible fee, so whether a lender charges a fee for a rate lock or not should be a factor when choosing a lender.

Having said that, if you find a lender that offers everything you're looking for, do not let the fact that you'll be charged for a mortgage rate lock discourage you as a borrower. Here's why: A mortgage rate lock can save you thousands of dollars over the life of a loan and quickly pay for itself. Plus, a mortgage lender that offers a free, or automatic mortgage rate lock will often build that cost into the loan in a different way -- meaning, your initial rate or closing costs will be higher.

Let's say you want to borrow $300,000 for 30 years and lock in a mortgage at 6.5% interest. Your monthly payment for principal and interest would be $1,896. Now, imagine that you did not lock in the interest rate early enough, and by the time you get to closing, the rate is 6.75%. That small difference means your principal and interest payments would be $1,946 per month instead, which is $50 more each month. By the time you pay the mortgage off in 30 years, you will have paid an extra $18,000.

Advantages of a mortgage rate lock

Rate locks are popular with buyers for a reason. Here are a few advantages of locking your rate into place early as a borrower:

• You are sure of your interest rate and are in a better position to determine how much house you can afford.
• With a locked rate, you can focus on what you need to do to get to closing, rather than worry about what is going on with interest rates or getting stuck with a higher rate if your closing is delayed.
• You can usually extend the low rate for longer if needed.

Disadvantages of a mortgage rate lock

Rate locks can be helpful but are not perfect. Here are two of the reasons buyers should think twice before locking in an interest rate:

• Rates can change by the hour, and you have no way of knowing if rates will go down before you close on your loan.
• If interest rates do go down, you are stuck with the rate you locked in -- you can't get a lower rate. The exception is if the original rate lock has a "float-down" provision written in to cover such a situation. If a lender does provide a float-down provision, you can expect to pay more for the rate lock.

When it's time to lock in your mortgage rate, figure out how long you're likely to need the lock in place. Then, oversee deadlines so that your lock does not expire before you close on your mortgage.

Still have questions?

Here are some other questions we've answered:

• Loan Estimates: Everything You Need to Know
• What Are Mortgage Points and How Do They Work?
• What Is a Mortgage Note?