The Pros and Cons of a Locked Interest Rate on a Mortgage Loan

What Does It Mean to Lock a Loan?

Illustration of a stressed woman sitting on the floor looking at a long mortgage document. Text explains what a loan lock is.

Image by Yifan Wu © The Balance 2019

When closing on a mortgage loan, everybody wants to time it to get the best deal. But interest rates can fluctuate daily, making it hard to find the perfect time to get a loan. With a locked interest rate, however, you're guaranteed to pay the lower interest rate if rates go up by the time you are ready to close. In other words, a loan lock is a way to protect yourself while you continue to shop around.

Key Takeaways

  • When comparing mortgages, you can lock your interest rate for a specified amount of time.
  • Locked rates can give you more time to shop around for a mortgage lender.
  • Loans can lock in the interest rate, the points, and the length of the lock.
  • Locking your loan rate protects you from rising interest rates.

Is Your Loan Rate Automatically Locked?

Most mortgage lenders will automatically lock your loan for an initial period, but not all of them will. If they do, some standard locking periods are 30, 45, or 60 days. If you're unsure, check your initial loan estimate—it should clearly state whether your rate is locked and for how long. If it's not, then you can discuss your loan lock options with your lender and decide whether you want to lock yours.

Your lender may also offer you the option to extend your lock for a longer period.

What Are the Risks if the Loan Is Not Locked?

Let's say you decide to wait. You've narrowed down where you will get a mortgage and looked at all your loan choices. Maybe you've even decided on the loan product you want. But the housing market is falling. The Federal Reserve has cut interest rates twice, and you expect them to drop further. So you decide not to lock.

This is no different than gambling. Rates may go down, and your gamble could pay off. In that case, you would have been a little worse off if you had locked your loan. But if rates go up, you have no protection. You will pay a higher rate if you remain with that lender—a lock would have prevented the increase.

What Are the Main Elements to Loan Locks?

When deciding to lock a loan, there are three points to consider:

  • Interest rate
  • Points
  • Length of the lock period

If you're still shopping around and need more time but want to keep a loan locked, you'll pay extra for an extended loan lock. The lender might increase the interest rate or use points to reflect the loan lock fee. That's because the lender is taking on more risk—the risk that rates could go up while the transaction is processed. This can cause the lender to lose money if they fund a loan at a lower-than-market interest rate.

Despite the cost of a loan lock, it's a good idea to lock your loan rate since it offers you peace of mind. If you have decided you can afford the current loan terms, it's probably a good time to lock them in.

Are You Stuck With the Loan if You Lock?

Locking in the rate does not mean you're wedded to that lender. You're free to go elsewhere for a loan if the rates have gone down when the transaction is ready to close. Many borrowers think they are stuck with the loan they have locked in. However, the truth is that if rates go down and you threaten to pull the loan, the lender will probably renegotiate the interest rate because it wants to keep its customers.

How Are Loan Lock Rates Figured?

A 30-day rate lock might cost you half a point, whereas a 60-day rate lock might cost one full point. Points are a percentage of the loan amount. So, half a point on a $200,000 loan is $1,000. You won't pay these fees paid upfront; you'll pay them at closing. So if the loan never closes because you've changed your mind or gone elsewhere, you won't pay a fee.

In most cases, if you don't want to pay for the loan lock through points, the fee can be computed into the interest rate.

Is There a Downside to a Loan Lock?

There is rarely a reason not to lock a loan. Interest rates change daily, sometimes even hourly. To protect yourself against the marketplace's volatility, it's a good idea to lock your rate once you are satisfied with it.

Just remember that if the rate was acceptable when it was locked three weeks ago, a drop of an eighth of a point or so isn't the end of the world. You don't need to try to squeak out every dime to get a good deal. The important thing is that you end up with a home you're happy with at a price you can afford.