Mortgage Rate Lock: Definition, How It Works, Periods, and Fees

What Is A Mortgage Rate Lock?

A mortgage rate lock is an agreement between a borrower and a lender that allows the borrower to lock in the interest rate on a mortgage for a specified time period at the prevailing market interest rate. A loan lock provides the borrower with protection against a rise in interest rates during the lock period.

The lender may charge a lock fee, which the borrower must pay if they do not lock the interest rate. Alternatively, the lender may charge a marginally higher interest rate to begin with, just in case the borrower chooses not to lock the interest rate.

Explaining a Mortgage Rate Lock

When a borrower locks in an interest rate on a mortgage, it should be binding for both the borrower and the lender. The interest rate is locked for the period from the offer of the loan to its closing. The rate will stay consistent, regardless of market changes, as long as there are no changes to the application for the loan during the closing period. If there is new or corrected information on the borrower’s income or credit score, or if the loan amount changes, these could affect the interest rate regardless. Furthermore, if the borrower changes the type of mortgage they are seeking or if the appraisal of the home is lower or higher than anticipated, the interest rate may change.

If rates go down, the borrower may have the option to withdraw from the agreement. The probability of such a withdrawal is known as a fallout risk for the lender. The borrower should take great care, however, to ensure that the lock agreement allows for withdrawal.

In some cases where prevailing rates decline during the lock period, the borrower may have the option to take advantage of a float-down provision to lock in a new, lower rate. As with any feature that increases interest-rate risk to the lender, a float-down provision will only be available at an additional cost to the borrower.

Mortgage locks generally last for 30 to 60 days. At a minimum they should cover the period necessary for the lender to process the borrower’s loan application. An example of a short lock period is one that expires shortly after completion of the loan-approval process. In some cases this lock period can be as short as a few days. A borrower can negotiate the terms of a loan lock and often extend the term of the lock for a fee or slightly higher rate.

Risks of Taking on a Mortgage Rate Lock

A downside, for the borrower, is a mortgage rate lock would prevent them from taking advantage of lower rates that may occur during the lock period. Conversely the lender cannot take advantage of rises in interest rates.

Some borrowers walk away from the agreement if interest rates fall, and unscrupulous lenders have been known to let lock periods expire if interest rates rise under the guise that the borrower could not process the necessary paperwork in time.

A lock deposit requirement indicates that both the borrower and the lender intend to keep the agreement. A rate lock may be issued in conjunction with a loan estimate.

A mortgage rate lock period could be an interval of 10, 30, 45, or 60 days. The longer the period is could mean a higher interest rate is agreed upon. Essentially the rate lock would be lower on shorter intervals till the close because there is less risk of fluctuation in the market. If the lock period expires and the mortgage has not closed, it may be possible to request an extension to the rate lock. If an extension is not granted, then they mortgage will be subject to the going market rates.

Even with a rate lock and a mortgage rate lock float down, it is possible to end up paying a higher interest rate than the rate that you agreed to when you signed for the lock. This occurs because many lenders include a "cap" with the lock agreement. The cap permits the guaranteed rate to rise if interest rates rise before settlement. Because the cap sets a limit on the amount the rate can rise, it does provides some protection against rising interest rates.