What it means
Between applying for a mortgage and closing, weeks can pass. During this time market interest rates may change, and a rise could make the loan more expensive.
A rate lock fixes the quoted rate for an agreed period, such as 30, 45 or 60 days, so the borrower knows what the cost will be. Some lenders offer a lock for free, while others charge a fee or require a deposit.
The deposit can be a flat sum or a small percentage of the loan amount. Terms differ, so the borrower should ask whether the deposit is refundable, whether it is credited against closing costs and what happens if the lock expires.
The lock is a trade-off. If rates rise, the borrower gains by keeping the lower rate, but if rates fall, the borrower may be stuck with a higher rate unless the lender offers a float-down option.
Float-down features let the rate drop if the market improves, and they usually cost extra. Timing is critical.
If the lock expires before closing because of delays, the borrower may have to pay for an extension or accept the current market rate. Borrowers can reduce this risk by choosing a lock period that is long enough for the expected closing date plus a small cushion.
For lenders, the deposit is a way to share the risk, because a lock commits the lender to a rate even if the market moves. A deposit that is forfeited if the borrower walks away compensates the lender for the cost of holding the commitment.
Before paying, borrowers should get the lock terms in writing and note the exact expiry date. A short checklist, covering the deposit, the lock period, extension fees and any float-down right, avoids costly surprises close to closing.
In practice
Real-world examples.
Example
A buyer expects interest rates to rise and locks a 30-year rate for 45 days. She pays a $1,500 deposit that is credited to her closing costs. Rates rise before closing, and her lock saves her hundreds of dollars a year. The credit also reduces the cash she needs to bring to the closing table.
Example
A couple lock their rate for 30 days, but the seller delays the closing by two weeks. The lock expires and the lender charges $800 for a ten-day extension. They learn to choose a longer lock when closing dates are uncertain, even though a longer lock can cost a little more.
Example
A buyer pays a deposit but then decides not to buy the house because the inspection reveals serious problems. The lender keeps part of the deposit to cover its costs. She reads the paperwork carefully and finds that she had agreed to this.
Formula
Calculation
Deposit = Loan Amount x Deposit Percentage
Extra Annual Interest if Rates Rise = Loan Amount x Rate Increase
Suppose a borrower takes a $400,000 loan and the lender requires a deposit of 0.5%. Deposit = 400,000 x 0.005 = $2,000. If market rates rise by 0.25 percentage points before closing, the extra annual interest would be 400,000 x 0.0025 = $1,000, which is what the lock protects against in the first year.Case study
Seen in the real world.
Elmstead Property Group is an illustrative, fictional developer that sold flats with buyers financing through mortgages. The sales manager noticed that several buyers were losing their rate lock because the building's completion date kept slipping.
Each buyer had paid a deposit of around $2,000 for a 60-day lock, and 5 of 20 locks expired before completion. The extension fees and lost deposits upset the buyers and created complaints.
The manager started giving buyers a realistic completion window and encouraged them to choose a lock period that covered it. The company also asked its lender partners to offer extensions at a lower fee for delayed buildings. The illustrative lesson is that the best lock length depends on the true closing date, not the hoped-for one.
Watch out
Common mistakes.
- Locking a rate for too short a period, when delays can lead to expiry and extension fees.
- Assuming the deposit is always refundable, when many lenders keep it if the borrower withdraws.
- Locking too early without comparing offers, when the lock may commit you to one lender and make switching costly.
Questions
People also ask.
Is the rate lock deposit refundable?
It depends on the lender, but it is often credited to closing costs if the loan completes, and may be partly or fully lost if you withdraw.
What is a float-down option?
It lets you take a lower rate if market rates fall during the lock period, usually for an additional fee.
How long can I lock a rate?
Common periods run from a few weeks to a couple of months, and longer locks often carry higher costs, so match the period to your expected closing date.
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