By locking your mortgage, you eliminate the risk that your interest rate goes up over the course of processing and closing your mortgage. As the name suggests, by locking your mortgage the lender agrees to set the terms of your refinancing, including interest rate and origination fees, for the timeframe of the lock period. Depending on market conditions and the length of the lock period, some lenders charge borrowers a higher interest rate or fees to lock their refinance, although this is not always the case. Borrowers should be sure to understand how locking their refinance, and the length of the lock period, impacts their interest rate and fees.
Typical mortgage rate lock periods are for 12, 21, 30, 45 or 60 days. Some lenders also offer rate locks for up to 180 days. Because it is so short, the 12 day lock period is typically provided by the lender free of charge and is utilized when the borrower has satisfied all funding conditions and your refinance is ready to close. In a declining or static interest rate environment, the borrower will want to utilize the 12 day lock period, or no rate lock at all. This is called "floating" the mortgage.
Rate lock period is also an important consideration when you shop for a mortgage. When you review loan proposals or quotes from different lenders check the length of the rate lock period they use. You want to understand how long the loan terms they are offering are valid for. One lender may be quoting you a 21 day rate lock versus a 45 day lock period offered by another lender. The difference in lock periods makes their loan terms, including mortgage rates and closing costs, less comparable. The quote with the shorter rate lock period holds less weight because you are unlikely to close your loan during the specified time period while the offer with the longer rate lock period offers more certainty but likely a higher mortgage rate too. In an ideal scenario you compare mortgage proposals with similar or the same lock period.
In a rising interest rate environment, borrowers should lock their refinance for the length of time necessary to process the loan, using a conservative assumption. Borrower should always do diligence at the beginning of the refinance process to understand how long it takes the lender to process, approve and fund the loan. A typical refinance takes approximately 30 - 60 days to complete after your loan application has been accepted by the lender although there may be unexpected events or delays that extend the closing timetable. We recommend that you work with your lender to determine how long it will take to close your refinance, depending on your individual circumstances. We also advise borrowers to build in an extra cushion in case unforeseen events occur that delay refinance process.
Be sure that the length of your mortgage lock period is long enough to process and close your refinance
Generally speaking, the longer the lock period, the higher the interest rate, as illustrated by the example charts below. Although it may come at a cost to the borrower in terms of a higher interest rate, the insurance you receive by locking your refinancing as compared to a greater increase in interest rate due to market conditions can save you thousands of dollars over your mortgage. Be sure to discuss the interest rate environment as well as the pros and cons of locking your refinancing with your lender at the beginning of the refinance process.
If you decide to lock your loan, you should request that your refinancing terms are locked immediately after the lender accepts your loan application, so at the beginning of the refinancing process. If the time it takes the lender to process your refinancing exceeds the rate lock period it may be possible to ask for a rate lock extension. In a rising interest rate environment a lender may be unwilling to provide a rate lock extension or may try to charge the borrower for a rate lock extension. These fees are relatively uncommon and should be avoided. Be sure to ask your lender at the beginning of the refinancing process if they charge rate lock extension fees. If the answer is yes, consider working with a different lender.
Although locking your refinance is intended to protect you if interest rates increase before your mortgage closes, what happens if rates decrease during the rate lock period? Many lenders offer borrowers the option to "float down" their locked interest rate to the lower market rate if rates go down during the rate lock period. "Floating down" enables borrowers to lock-in the lower interest rate before their refinance closes. For example, if you locked your interest rate at 4.250% when you applied for your refinance and rates drop to 4.000% during the rate lock period, you can "float down" your rate and lock-in the lower 4.000% rate.
Most lenders apply rules that dictate how and when borrowers can float down their rate during the rate lock period. Lenders typically offer the float down option for free and do not charge borrowers when they elect to float down their rate. Lenders may require a minimum reduction in interest rate for borrowers to use the float down option. For example, in some cases the new interest rate must be at least .250% lower than the old interest rate. So if interest rates only declined .125%, the borrower would not be permitted to float down the rate.
Additionally, most lenders only allow you to float down the rate one time during the rate lock period and limit when you can float down your rate. For example, some lenders only allow you to float down your interest rate within thirty days of your scheduled closing date or within thirty days of of the expiration date for your rate lock. So if interest rates decline significantly relatively soon after you locked your mortgage rate, you may have to wait before you can use the float down option. Borrowers should be sure to understand the terms, conditions and potential cost of the float down option before selecting a lender for their refinance and locking their interest rate.
The table below shows refinance rates, closing costs and rate lock periods for top lenders in your area. The lock periods in the table usually range from 30 to 45 days. In some cases, lenders with shorter rate lock periods offer higher mortgage rates while lenders with longer lock periods offer lower rates. This demonstrates that the rate lock period is only one of many factors that influences loan terms.
While rate lock period is an important consideration when you shop lenders, its primary purpose is to let you know how long the refinance terms are good for and the lock period should not be the primary reason you select a lender. We recommend that you contact multiple lenders in the table below to compare refinance proposals and confirm their rate lock period. Comparing lenders and loan quotes enables you to find the best refinance terms.
Mortgage Rate Lock: https://www.consumerfinance.gov/ask-cfpb/whats-a-lock-in-or-a-rate-lock-en-143/