Locking In a Mortgage Interest Rate

Mortgage interest rates are unusually low right now, but it's not certain how long they'll stay that way. So when applying for a mortgage, either to purchase a home or refinance an existing loan, you'll probably want to lock in the rate when you apply.

A rate lock, also called a rate commitment, ensures that you'll be able to get the mortgage rate that was available at the time of your application. Because mortgage rates can change rapidly, and mortgage applications can take several weeks to be approved, locking in your rate means you can be sure of getting the rate you bargained for.

When you lock in your rate, you want to be sure that the lender is guaranteeing both the interest rate and points. Most lenders already do this as a matter of course, since the points paid affect the interest rate, but occasionally you'll find one who doesn't as a way of providing themselves some "wiggle room" if rates should rise before the loan is approved.

It's also a good idea to insist that the lender to lock in other fees as well, since they also affect the cost of your loan. Some may not be willing to do so, but this is one of the things you should find out when shopping around for a loan.

Deposit or application fee may be required

You may or may not have to pay outright for a rate lock. Many lenders will lock in a rate for up to 30 days for no charge, although you may have to post a deposit, which you'll lose if you decide not to go through with the loan. Other lenders may charge an application fee of several hundred dollars, particularly if the interest rate they're offering is highly competitive.

You'll also probably have to pay a fee if you want to lock in your rate for more than 30 days, which you may want to do in the current mortgage market. With lenders giving extra scrutiny to loan applications these days, along with heightened demand for mortgage refinancings due to low rates, mortgage applications may take several weeks to get approved. Before submitting an application, be sure to ask your lender how long they expect it will take your application to be approved and make sure your lock-in period will cover it.

When to apply

When purchasing a home, you apply for a rate lock after your offer has been accepted by the seller - otherwise, you'd be locking in a rate without knowing how much you're borrowing or when you'll actually be buying a home. A rate lock is different from getting a loan pre-approved - the rate lock means you're actually applying for a mortgage, whereas a pre-approval simply means the bank thinks you'll be able to get a loan.

For refinancing, you can get a rate lock at any time you find an interest rate you want to commit to and are ready to apply for the new mortgage. Some lenders will allow you to set a "target rate" that they will lock for you if interest rates fall to that level - and your lock-in period begins when that rate is reached. This can be useful for potential borrowers who need to obtain a certain rate or better to make it worthwhile to refinance their current mortgage.

What if a lower rate becomes available?

Locking in a rate does not commit you to taking out a loan, but you'll likely lose your deposit or application fee if you back out after locking. However, you may want to go ahead and do so if rates drop after you lock in. You'll lose your deposit, but a reduction of 1/8th of an interest point will more than make up for it within 2-3 years on most mortgages, perhaps longer if the loan is a small one.

For this reason, a lender will sometimes agree to reduce the locked-in rate if rates fall during the lock-in period, rather than see you go to another lender. It probably won't be as low as you could get from the other lender, but you won't be sacrificing your application fee or deposit, either. Some lenders will also allow you to lock in a rate with a "float down" provision for an additional fee, which will enable you to get a lower rate if interest rates fall during the lock-in period, though probably not as low as you could get by seeking a new lock from a different lender.