What Is a Mortgage Rate Lock Deposit?

A mortgage rate lock deposit is a fee a mortgage lender charges a borrower to lock in an interest rate for a certain time period, with the expectation that the borrower's mortgage will fund within that time period.

The longer the lock period, the larger the required lock deposit. The lock deposit is credited back to the borrower when the mortgage funds. If the borrower walks away from the mortgage and lock agreement, they lose their lock deposit.

The Formula for a Mortgage Rate Lock Deposit

MRLD formula
MRLD formula. Investopedia

How to Calculate a Mortgage Rate Lock Deposit

Calculating the deposit amount involves simple multiplication. First, find out the percentage charge for the rate lock deposit, then multiply it by the mortgage amount. The charge for a rate lock could range from 0.25% to 0.5% of the amount of your mortgage. For example, on a mortgage loan of $450,000, a 0.25% rate lock deposit would be $1,125.

What Does the Mortgage Rate Lock Deposit Do?

A mortgage rate lock protects the borrower from having to pay a higher annual percentage rate on their mortgage loan should rates climb during the period between loan approval and mortgage funding. Borrowers often wait until they have found a home to purchase before paying a deposit to lock in their rate. They do so because the time it will take to find a home and have an offer accepted is uncertain.

Lenders use mortgage rate lock deposits with fixed-rate mortgages whose rates are tied to the yields of U.S. Treasury securities. Fifteen-year mortgages are tied to the yield of the 10-year Treasury note while 30-year mortgages correspond to the yield of the 30-year Treasury bond.

Mortgage rates can be impacted when yields on these securities rise, either due to the Federal Reserve raising short-term interest rates or trends such as faster economic growth or rising prices that cause bond investors to demand higher yields in anticipation of inflation.

Key Takeaways

  • Using a mortgage rate lock deposit can give you peace of mind.
  • A rate lock lets you know what your mortgage payments will be, helping you budget accordingly for a new home purchase.
  • If interest rates drop after you've paid to lock in a certain rate, your lender may charge you extra to switch to a lower rate, or you might be stuck with the higher rate and the loss of your deposit if you walk.

Example of How a Mortgage Rate Lock Deposit Is Used

Mortgage rate lock deposits lock in a certain interest rate on a loan, and they're charged based on a rate of roughly 0.25% to 0.50% of the mortgage amount. For a $300,000 mortgage, for example, a deposit of $750 to $1,500 would be required.

Rate locks typically last from 30 to 60 days, but some lenders will extend a rate lock for 120 days or more. Certain lenders may offer a free rate lock for a specified amount of time but then charge fees for extending the lock. Borrowers can’t lock in a rate until after their initial mortgage approval.

Limitations of a Mortgage Rate Lock Deposit

Making a mortgage rate lock deposit can save borrowers hundreds if not thousands of dollars in mortgage interest in periods of rapidly rising interest rates, but the process also carries risks.

Locking in too early can cause a borrower to miss out on a better rate that may be available before closing. In addition, a borrower may be forced to pay an additional deposit to extend the lock once it expires. A rate lock can also be canceled if the borrower’s financial circumstances change before closing, such as a decline in their credit score or a rise in their debt-to-income ratio.