What is a Mortgage Rate Lock?
A mortgage rate lock allows customers in need of mortgage financing to “lock” in their interest rate. This is an important feature of mortgages because the markets that influence mortgage rates (Mortgage backed securities, or MBS) trade each day and in certain markets can be very volatile. Rates can change daily, and sometimes even multiple times in a single day, so having the option for a mortgage rate lock can protect against some of that volatility.
How It Works
With most mortgages a mortgage rate lock happens during the process and a rate is locked to cover the period of time from when the loan process starts through closing and funding. A borrower will select a lock period and their rate is set at the locked rate for the duration of the lock period. The most common mortgage rate lock time frames are 30 or 45 days, but in extremely busy markets it can be more typical to see 60 day locks. In improving markets when rates are going lower, sometimes a lender will wait until just before closing and do a 15 day (or less) rate lock. Typically, the shorter the rate lock period, the better the rate/pricing will be.
In other situations where a customer wants to lock in a rate to avoid market volatility (ie a market where rates are expected to go up), a mortgage rate lock can be obtained for a longer period of time. In some cases, this requires an up front fee, usually used more as a deposit that gets refunded at closing, as is the case with MasonMac’s “Lock & Shop” program . This type of lock can protect home buyers during a new build, rebuild, or a situation where they’re looking for the right home and want to ensure their monthly payment ends up being what is expected. These longer term mortgage rate lock programs offer that option.
What If the Markets Get Better (or Worse)
By the very nature of a mortgage rate lock, if markets get worse (rates rise), a borrower is protected by their mortgage rate lock. The rate on their loan cannot increase if it’s locked, even if market rates rise. But what if rates get better after a borrower locks in? There are some protections in place. Usually, if the market sees just slight improvements, a locked loan will retain it’s locked rate. But if the market improves substantially, borrowers can be offered the opportunity to “float down” their rate to the current market levels. Sometimes there is a cost for this, but a borrower who has already locked their rate can take advantage of an improving market. This makes a mortgage rate lock a good idea because in a bad market (rates rising) a borrower is protected, and if the market gets really good really fast, a borrower can usually still take advantage. Every lender has a different policy on “float downs” so it’s important to ask your loan officer to explain further.
How to lock your rate
Your MasonMac loan officer can review lock options with you to see which type of mortgage rate lock best fits your situation. If you’re interested in new builds and think rates may go up (or the numbers for you to qualify are tight and rising rates could disqualify you from a loan completely), our lock & shop option may be best. If you’ve identified a home and are under contract, a shorter term lock would offer you better pricing and protection to your rate through closing. Our experienced team of loan officers can help you select the option that’s right for you, and talk to you about the best mortgage rate lock options available. Once you decide to lock, it’s an easy process for your loan officer to make it official, and you’ll receive documentation that reiterates the terms of your mortgage rate lock.