Rate Locks, Explained.

August 11, 2022 derekevansteam

Mortgage interest rates fluctuate often, which can make it hard for homebuyers to snag their ideal rate at closing time. So how can you get clarity and protect your rate (and payment)?

That’s where a mortgage rate lock comes in, and working closely with your loan officer will help you make the right moves.

Learn what a mortgage rate lock does, when you should do it, and why.

What is a mortgage rate lock?

To understand a mortgage rate lock, you need to know a bit about mortgage interest rates. Mortgage rates fluctuate often based on several factors, such as:

Economy: A booming economy usually equals increasing interest rates, while a struggling economy typically means rates may drop.

Supply and demand: Interest rates typically are higher if the demand for homes is high (though that hasn’t been true recently!)

Federal funds rate: The Federal Reserve sets the funds rate to steady inflation. The funds rate is set for banks and other financial institutions, and it is known to influence or mirror mortgage interest rates.

Mortgage-backed securities: These loan bundles are sold to investors, and the price they sell for can influence mortgage interest rates.

The COVID-19 pandemic is a prime example of how economic and supply and demand factors influence mortgage rates. As the economy struggled, the interest rates fell to record lows.

As demand for homes increased and the economy began to stabilize, mortgage rates began to rise. Many homeowners rushed to refinance their mortgage during these historic lows, so they could get a better rate and lower monthly payments.

When can you lock your interest rate?

On a home purchase, you are only able to lock your interest rate once you have entered into a contract on a home. Specifically, lenders cannot lock an interest rate until the property address is known and entered on an application.

This means that the interest rate on your loan pre approval is not locked! The term for this is a rate “float” which means the interest rate will continue to be subject to market changes until a contract is fully executed and the rate is locked.

The interest rate at that time can be higher or lower than the initial rate used for preapproval. Therefore, the monthly payment disclosed once the rate is locked could be higher or lower than the payment initially discussed.

Loan originators don’t have control over interest rates, but once your loan is locked, your interest rate will be secured until your closing day, so you can be sure your rate, and payment, is safe.

Benefits of a mortgage rate lock

Rate locks protect borrowers from market fluctuations. Many loan officers recommend borrowers lock in their rate if they like the payment discussed, especially when interest rates are on the rise.

Rates could potentially fluctuate enough from approval to closing that it would result in a to cost borrowers thousands of dollars, so locking rates as soon as possible can be impactful to the cash required to be brought to closing.

If you’ve locked in and rates go up during the period of time when your rate is locked (prior to closing), your rate and payment will not be affected. The amount of time a rate is locked depends on your lender, but common time periods are 30, 45, or 60 days. Some lenders, like Fairway, can also offer extended rate locks for new build homes, up to 270 days.

Rate locks offer borrowers the peace of mind that their rate is safe, and that they are comfortable with their payment.

Even experts who know the ins and outs of mortgage rates can incorrectly predict their movement. If you decide to float your rate in the hopes of snagging a lower rate at closing, it’s important to understand the risks involved.

Rate lock considerations

If your financial situation changes your approval — and your rate — could change. Your rate can be affected by the following potential changes:

Loan type switches
Down payment amounts
Credit score increase or decrease
Income amount
Debt increases
New job

Discuss any unavoidable life or financial changes with your loan officer as soon as possible to determine how it might affect your rate. Honesty and transparency are the keys to a smooth mortgage loan process.

How to lock your rate

If you’re interested in locking your rate, speak with your loan officer! They will be able to help you determine when to lock your rate, plus describe all the conditions that could affect your rate once it’s locked.

Ready to get started?

Our professional loan officers are eager to help you through the loan process step by step, from applying to closing.
We will work with you at your desired pace, using our industry knowledge and honest feedback to get you the best available rates.