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, which can make it hard to find the perfect time to get a loan. With a locked interest rate, however, you are guaranteed that if interest rates go up by the time you are ready to close, you will still pay the lower interest rate. In other words, a loan lock is a way to protect yourself while you continue to shop around.

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, the rate is usually locked for 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 market is moving down. The Fed has cut rates twice and you expect them to drop further. So you decide not to lock.

It's a gamble. 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 the higher rate if you remain with that lender.

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

Borrowers will pay extra for an extended loan lock. The interest rate will be a bit higher or the points will reflect the loan lock fee. That's because the lender is taking on the risk that rates could go up while the transaction is processed, so the lender could end up losing money if the loan is funded at a lower-than-market interest rate.

Despite the cost of a loan lock, real estate experts generally recommend that borrowers lock their loan rate since it offers 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 the borrower is wedded to that lender. The borrower is actually free to go elsewhere for a loan if the rates go down by the time the transaction is ready to close. Most borrowers don't realize this little-known fact. However, the truth is that if rates go down, and the borrower threatens to pull the loan, generally the lender will renegotiate the interest rate because it wants to keep its customers.

How Are Loan Lock Rates Figured?

A 30-day rate lock might cost the borrower 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. These fees are not paid up front; they are paid at closing. So if the loan never closes because the borrower has changed their mind or gone elsewhere, they don't pay the 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 hourly. To protect yourself against the volatility of the marketplace, 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.