Why Closing Quickly Could Help You Get a Low Interest Rate

Interest rates can fluctuate several times per day. Locking in a mortgage interest rate for a short period of time and closing quickly may protect you from market fluctuations and help you save money. 

What Is a Rate-Lock?
A mortgage rate-lock means a lender offers a borrower a specific interest rate for a period of time agreed upon by the borrower and the lender, regardless of changes in the market. Some lenders issue a rate-lock when a loan estimate is approved, others when a borrower has been preapproved and has provided the address of a house the borrower is thinking about purchasing. Some lenders will only lock in a rate when a seller has accepted a borrower’s offer.

The term of a mortgage rate-lock is usually 30 to 60 days, although longer and shorter terms are sometimes available. A longer lock period usually has a higher interest rate. With a shorter term, a lender typically offers a lower interest rate since there is a low risk of a significant market fluctuation. 

Some lenders charge a lock fee. It’s usually rolled into the interest rate offered, not listed as a separate fee. 

A rate-lock holds the interest rate steady, assuming the information on the loan application stays the same. If your income, your credit score, the amount borrowed, the appraised value of the house or the type of mortgage changes, the interest rate may also change.

What If the Rate-Lock Expires Before the Mortgage Closes?
If your mortgage hasn’t closed by the time the rate-lock expires, the lender may agree to extend the lock term, but you might have to pay a fee or agree to a slightly higher interest rate. If the lender refuses to grant an extension, your mortgage will be at the going interest rate. 

How Could Changes in Interest Rates Affect Your Locked-in Rate?
If you enter a lock agreement and the interest rate falls before you close on the house, and if your agreement contains a float-down provision, you will be able to withdraw from the agreement and lock in a lower rate than the one you initially locked in. If the lender offers a float-down provision, you will have to pay extra for it. 

If interest rates rise before the mortgage closes, the lender may charge you a higher rate than your locked-in rate. Lenders often include a “cap” in a rate-lock agreement that limits the amount of a potential increase to protect borrowers.

Should You Lock in Your Interest Rate?
Locking in a low interest rate can save you money, but it’s important to get the timing right. If you lock in a rate too soon or choose too short a term, the rate may expire before your mortgage has closed. Ask your lender when it expects your loan to close and choose a rate-lock period that will give you some wiggle room in case you encounter a delay.