A mortgage lock is an agreement between the lender and the borrower to use a specific interest rate, which is the prevailing market interest rate at the time the loan is offered. The rate will not change, regardless if the market interest rate rises or falls.
The only situation where the interest rate is no longer locked is if there is a change to the loan application. For example, if the borrower’s credit score or income is adjusted, if the borrower changes the type of mortgage, or the house is appraised for higher or lower than expected, the interest rate may vary.
The exact time you can lock an interest rate depends on the lender. In general, most homebuyers will lock in a mortgage interest rate after they sign a purchase agreement. However, be careful that you do not lock in your rate too early.
Most rate locks are valid between a few weeks to 60 days. In general, locks come in intervals of 10, 30, 45, or 60 days. Ideally, your rate lock should last for the duration that your loan is in processing until you close. Don’t forget to account for unexpected delays.
In other words, find out when your loan is anticipated to close. If you approximate 45 days to close, you may consider a 45- or 60-day lock. Be sure to ask your mortgage lender the differences in cost and rates for both scenarios.
A longer rate lock period may result in a higher interest rate. On the other hand, a lower lock period would yield a lower interest rate because there is less risk of market fluctuation during this time.
If your lock period expires before you close, you may be able to request an extension for a fee. While the extension may be an upfront cost, it may still save you money if the interest rate has increased.
Depending on the lender, a mortgage lock may cost a flat fee, a percentage of the total mortgage amount, or an increase of the mortgage interest rate that you lock-in.
For example, a 30-day lock may have no fees or discounts. However, a 60-day lock may cost 1% of the loan amount or a slightly higher interest rate of 0.25%. It is essential to keep in mind that even a small increase of interest, such as a quarter of a point, can result in extra hundreds or thousands of dollars in interest each year.