What Happens If My Rate Lock Expires and Rates Go Down?

A mortgage rate lock is a formal agreement between a borrower and a lender that secures a specific interest rate for a home loan over a defined period. This arrangement is designed to protect the borrower from potential increases in market interest rates while their loan application is being processed and prepared for closing. It provides a measure of predictability, ensuring that the interest rate offered at the outset remains consistent, regardless of market fluctuations during the specified lock period.

What Happens When a Rate Lock Expires

When a mortgage rate lock reaches its expiration date without the loan having closed, the original secured interest rate is no longer valid. The loan becomes subject to current market conditions. Lenders typically have policies in place to address such situations, often involving a re-pricing of the loan.

Should the market interest rates have increased since the initial lock, the borrower would then face a higher rate than originally secured, leading to potentially higher monthly payments and greater overall loan costs. Conversely, if rates have declined, the loan might be re-priced at the current market rate, though it is important to understand that this re-pricing does not automatically guarantee the absolute lowest rate available in the market.

Lenders often charge fees if a rate lock expires and an extension or re-lock is needed. These fees can vary, sometimes ranging from 0.25% to 1% of the total loan amount, or they might be a flat fee. The longer the extension period required, the higher these fees typically become. Beyond market movements, specific changes to the borrower’s loan application, such as adjustments to income, credit score, loan amount, or property appraisal value, can also cause the original locked rate to become invalid even before its expiration.

Your Options When Rates Decline

When market interest rates fall after a rate lock has been secured, borrowers have several options to consider, each with its own implications. One common approach is to re-lock the rate at the new, lower market rate, often referred to as a “float-down” option. This allows the borrower to take advantage of the improved market conditions, but it typically involves a fee.

The fees for a float-down can range from a quarter to a full percentage point (0.25% to 1%) of the loan amount, or they may be a flat fee, depending on the lender’s policy. Lenders usually have specific criteria for allowing a float-down, such as requiring the loan to be conditionally approved and the market rate to have dropped by a certain minimum amount, often between 0.25% and 0.50%.

Another strategy is to “float” the rate, meaning the borrower chooses not to lock immediately and allows the interest rate to fluctuate with the market. This approach is typically undertaken with the hope that rates will continue to decline, potentially leading to even greater savings. However, floating the rate carries an inherent risk: market rates could unexpectedly increase again before the loan closes, resulting in a higher interest rate than initially anticipated. This unpredictability can make financial planning and budgeting more challenging for the borrower.

Alternatively, if the original locked rate is still acceptable or if the decline in market rates is minimal, a borrower might consider extending the original rate lock. Lenders usually offer this option for a fee, which can also range from 0.25% to 1% of the loan amount or be a flat fee, sometimes $500 or more. This is less common when the primary goal is to secure a lower rate, but it can be a viable choice if delays in closing are anticipated and the original rate provides sufficient benefit. Some lenders may even waive extension fees if the delay is attributable to their processing or third-party issues.

Communicating with Your Lender

Effective communication with your lender is important when approaching a rate lock expiration, particularly if market rates have moved favorably. It is advisable to proactively contact your loan officer well before the lock’s expiration date to discuss all available options. Understanding the lender’s specific policies regarding rate lock extensions, re-locks, and re-pricing is a necessary step.

Inquire about any associated fees for these actions, as costs can vary significantly between lenders and depend on the duration of any extension or the specific terms of a re-lock. Gathering information about current market rates you have observed and having a clear understanding of your loan application’s status can facilitate a more productive discussion with your lender. Rate lock periods commonly range from 30 to 60 days, though some lenders offer options for 90 days or even longer.

Making an informed decision involves carefully weighing the costs of re-locking or extending against the potential long-term savings offered by a lower interest rate, while also considering the inherent risks of further rate changes. It is also prudent to document all agreements made with your lender to ensure clarity and avoid future misunderstandings. Maintaining the integrity of your loan application by avoiding changes to income, credit, or the loan amount is also advised, as such alterations can sometimes invalidate a rate lock regardless of its expiration date.