Mortgage Rate-Lock: Is it Worth It?

Given that mortgage rates are at record lows, many borrowers are urgently wonder whether they should execute a mortgage rate-lock. With this post, I will try to provide some clarity on this question.

Let’s begin with the basics. As implied by its name, a rate-lock is an agreement between borrower and lender that literally locks in a mortgage rate at a certain (most likely the current) level. Such an agreement will generally specify an interest rate, discount/origination points, and an expiration date. [As an aside, locking in an interest rate is not the same as being approved for a loan. According to the Federal Reserve, "A lock-in is not the same as a loan commitment, although some loan commitments may contain a lock-in. A loan commitment is the lender’s promise to make you a loan in a specific amount at some future time."]

Historically, lenders required legally binding commitments from borrowers before they would issue a rate lock. Nowadays, this practice is less common, since lenders have come to perceive that it puts them at a competitive disadvantage. As a result, lenders compensate for the possibility that a) interest rates will rise and/or b) the borrower will renege on the rate lock, by charging a small premium to execute the rate-lock. Most rate locks expire within 30-60 days; while longer time periods can be negotiated, you can generally expect to pay a higher premium for a rate lock that expires later.

There are a few things to keep in mind with a rate-lock. First, the agreement should always be in writing, since oral agreements would be possible to prove, if need be. Second, you should always make sue to lock the points as well as the interest rate; failure to do so would enable the lender to compensate for a rise in interest rates by charging more points, without violating the rate-lock agreement. In addition, try to approximate (with the help of the lender) when your loan can realistically be closed so that you select an appropriate time period of validity. On your end, make sure you do everything necessary to close the loan before the rate-lock expires. Finally, make sure you read the fine print. Some rate-lock agreements contain clauses that render the whole contract void under certain circumstances, while other lenders slip in language which allows them to charge a higher rate than initially agreed-upon, as long as it doesn’t exceed a certain cap.

By this point, you’re probably wondering: What’s the point of a rate-lock, anyway? While certainly you can successfully go through the process of obtaining a loan without bothering to lock in the rate ahead of time, it certain makes the process much smoother. Knowing the interest rate ahead of time allows you to calculate your exact monthly mortgage payment, and confirm that it falls within your budget. It also makes a very stressful process (obtaining a mortgage) that much less stressful, since you don’t have to worry about whether rates will change prior to closing.

As to whether a rate-lock is right for you, that’s a question that only you can answer. No one can predict interest rates, which means it’s equally impossible to predict whether an interest rate-lock will ultimately prove to be a wise decision. Consider, however, that interest rates are currently at record lows. While they could certainly drift even lower, the conservative assumption is that they can only go up from here. If even a slight uptick in mortgage rates would jeopardize your ability to close on the loan, a rate-lock would be a safe choice. If, on the other hand, you have a cushion built in, not locking won’t do any harm, but could leave you feeling stresses until your loan closes. For those of you who are somewhere in between, consider a rate-lock agreement with a “float-down” option, which protects you against rising rates while also giving you some of the upside from lower rates. While you will have to pay a premium for this additional feature, at least you won’t be kicking yourself if you signed an agreement and rates plummet.