Definition
A mortgage rate lock is an agreement between a borrower and a lender that guarantees a fixed interest rate on a mortgage for a specified period, regardless of market fluctuations. This ensures that the borrower is protected from rising interest rates while they complete the home-buying or refinancing process.
Explanation
Interest rates fluctuate daily due to economic conditions, inflation, and Federal Reserve policies. Without a rate lock, a borrower’s mortgage rate could increase before closing, potentially raising their monthly payment. A rate lock protects against this uncertainty by securing a specific rate for a predetermined lock period, typically 30, 45, 60, or 90 days.
However, if interest rates drop after locking in a rate, the borrower is typically stuck with the higher rate unless they pay for a float-down option, which allows them to take advantage of lower rates before closing.
Key Aspects of a Rate Lock
- Lock Period – Usually 30 to 60 days; longer periods may require a fee.
- Expiration Date – If the loan doesn’t close before the lock expires, the borrower may need to pay for an extension or accept a new rate.
- Float-Down Option – Some lenders offer a one-time rate reduction if market rates decrease before closing.
Example
A borrower applies for a 30-year fixed mortgage at 5.5% interest and decides to lock in the rate for 45 days to ensure their mortgage payments remain stable.
- If interest rates rise to 6.0% before closing, the borrower still gets 5.5% due to the lock.
- If rates drop to 5.0%, they may need a float-down option or a new rate lock to get the lower rate.