What Happens If You Lock a Mortgage Rate and It Goes Down?

A mortgage rate lock serves as an agreement between a borrower and a lender, securing a specific interest rate for a set period. This mechanism provides stability during the loan processing phase, protecting the borrower from potential rate increases. A common scenario arises when market interest rates decline after a borrower has already locked in their rate. This situation often prompts questions about available options and how to navigate such a development to benefit from lower rates.

Understanding Your Mortgage Rate Lock

A mortgage rate lock represents a formal commitment from a lender to provide a specific interest rate on a loan for a defined period, assuming the loan closes within that timeframe. This agreement applies to a particular loan product, such as a 30-year fixed-rate mortgage, and is established after you submit your loan application and initial underwriting approval. The primary purpose of this lock is to shield you from upward fluctuations in interest rates during the underwriting and closing process.

The duration of a rate lock can vary, ranging from 30, 45, to 60 days, though some lenders may offer longer periods. During this committed period, the lender is obligated to honor the agreed-upon rate, even if prevailing market rates increase. These agreements are specific to each lender and loan program; terms and conditions, including any provisions for rate adjustments, are outlined in your individual rate lock agreement.

Exploring Options When Market Rates Decline

When market interest rates drop after you have secured a rate lock, several options may become available, depending on your specific lender and agreement terms. One such feature is a “float-down” option, offered by some lenders. This allows for a one-time adjustment to a lower interest rate if market rates fall significantly below your locked rate before closing.

Another possibility involves “re-locking” your rate, meaning negotiating a new rate lock with your current lender. This might be considered if the original lock is nearing expiration or if the market rate drop is substantial enough to warrant a new commitment. Re-locking effectively initiates a fresh rate lock period at the new, lower rate, contingent on lender approval.

A more significant step involves considering “starting a new application,” either with your current lender or a different one. This option is reserved for situations where the decline in market rates is substantial enough that potential savings outweigh the effort and costs of a new loan process. This approach may entail abandoning your original application to pursue a more favorable rate elsewhere.

Navigating Adjustments and Associated Costs

Pursuing a lower rate after locking requires understanding the practical steps, eligibility, and financial implications. If your original agreement includes a float-down option, contact your loan officer to initiate this process. Lenders require a minimum rate drop (e.g., 0.125% to 0.25%) before a float-down is permitted, and a specific window of eligibility (e.g., 10 to 15 days before closing). While some lenders offer this feature at no cost, others charge a fee, which can range from a flat fee of $250 to $500, or a percentage of the loan amount (e.g., 0.125% to 0.25%).

If a float-down is not available or the rate drop is more substantial, explore re-locking your rate with your existing lender. This involves direct negotiation with your loan officer to establish a new rate and potentially extend the lock period. Re-locking incurs fees, which may be similar to float-down fees or structured as an extension fee, varying from 0.05% to 0.25% of the loan amount for each week or month of extension. Understanding the impact on your closing timeline is important, as extending the lock or re-locking could slightly delay your closing.

Opting to start a new application, either with your current lender or a different one, is the most drastic approach and carries the most implications. This path necessitates new credit checks, updated financial documentation, and potentially forfeiting any appraisal or application fees paid on the original loan. The time commitment for a new application process is substantial, often requiring another 30 to 45 days, which could affect your closing date and any associated purchase agreements. Review your original rate lock agreement and communicate directly with your lender to understand all available options and their specific terms.

Finalizing Your Mortgage Rate at Closing

The final step in the mortgage process involves confirming your interest rate and loan terms at the closing table. At this stage, the rate agreed upon throughout the process, whether your initial locked rate or an adjusted rate from a float-down or re-lock, is formally established for the life of the loan. This confirmation ensures that the rate you anticipated is the one you will pay.

Before signing the final documents, you will receive a Closing Disclosure, a standardized form that details all the final loan terms, fees, and closing costs. Carefully review this document for accuracy, ensuring that the interest rate, loan amount, and all charges align with what you have discussed and agreed upon with your lender. Signing the loan documents legally binds you to the finalized rate and terms, completing your mortgage transaction.