What Is a Locked-in Interest Rate?

A locked-in interest rate is when a lender agrees to provide a set interest rate as long as the borrower closes by a set deadline. Locked-in interest rates are attractive to mortgage borrowers who think the rates may rise between their placing an offer and the final settlement dates. Locked-in rates are also known as a rate-lock or rate commitment.

Key Takeaways

  • A locked-in interest rate, also known as a rate-lock, is when the lender agrees to lock-in the interest rate before closing.
  • Lock-ins are generally used with mortgages, allowing homebuyers to ensure the rate does not increase from the time they accept the bank offer to closing on the home.
  • The lock-in rate may no longer apply if there are material changes to the mortgage application or credit report.
  • If interest rates fall during the mortgage negotiation, a lock-in effectively shuts them out of a better deal.

How a Locked-in Interest Rate Works

Locked-in interest rates can benefit homebuyers given rates on mortgages can rise daily, or even hourly. When a homebuyer decides to move forward with a mortgage agreement, the loan interest rate is often an essential factor in their decision. However, the processing of a home sale can be an extended process.

The market interest rate may rise between the point when the home buyer decides to move forward and the time when they finalize the agreement with the bank. A locked-in interest rate protects the homebuyer from the possibility the interest rate may rise.

By locking in the rate, the bank agrees not to change it as long as the borrower closes within a set time frame, often 15, 30, 45, or 60 days, and does not make significant changes to their application. The interest rate may longer be locked-in if there are changes to the borrower’s application, such as the appraisal coming in lower than expected or a change in credit score. 

For instance, if the appraisal reveals a home value that is higher or lower than expected, the bank may change the rate. The bank may also raise a previously locked-in rate if there are issues in confirming the borrower’s income, if the borrower misses a payment on another loan, or if there are other changes to their credit report.

Special Considerations

The expense of a locked-in interest rate depends on the various lending institutes and the circumstances of the individual borrower. Some lenders offer short-term rate locks at no charge, but the buyer can expect to pay a higher percentage for more extended locked-in rates.

If a borrower needs an extension for the closing date, lenders may charge a fee. The fee is generally a percentage of the total mortgage and tends to run between 0.25% and 0.50%. For commercial loans, there is usually always a lock-in rate fee.

In all cases, borrowers should ask to view the lock-in agreement in writing and consider reviewing it with a legal or real estate professional before signing. Borrowers may also benefit from asking the lender what would happen if a delayed settlement occurs through no fault of their own.

Homebuyers should also consider the possibility that interest rates will decrease during the mortgage negotiation—in which case, a lock would effectively shut them out of a better deal.