What happens if you lock a rate, then rates go down?
Locking your mortgage rate is an essential step in the home-buying process.
But what if rates fall after you lock one in? Do you have options or are you stuck with a higher rate compared to the market?
Mortgage expert Ivan Simental explained what borrowers can do in this scenario on a recent episode of The Mortgage Reports Podcast. Here’s what he had to say.
Listen to Ivan on The Mortgage Reports Podcast!
How mortgage rate locks work
Securing your mortgage rate is a major part of buying a house and getting a home loan.
When you buy a property and sign the purchase contract, your loan officer should immediately talk to you about where the current interest rates are and what rate you qualify for, Simental explains.
Once you lock a rate in, it’s fixed for the life of the loan — or for the initial period, if you opt for an adjustable-rate mortgage (ARM) — and doesn’t change regardless of what happens in the housing market or in lending news.
“It’s guaranteed that you are going to get that interest rate, no matter if rates tank, no matter if rates get better,” he said.
However, rate locks expire if you don’t accept the terms during the hold period. Those holding periods are commonly 30 or 60 days but can be as short as seven days and even as long as 360 days.
Can you drop your rate after locking it?
Locking in a mortgage rate comes with the inherent risk of foregoing a lower rate if they happen to drop. But you may have options if you want to get out of a lock or hedge against possible decreases.
Option 1: Wait to lock
If you think the market points towards rates falling, you can always decline your lock and gamble on them coming down. Of course, this could be a risky strategy and comes with the chance that you end up with a higher rate than your original quote.
Keep in mind that if your rate and payment go up significantly, you may not be able to afford the same home loan amount that you could when you got preapproved. This could put your entire home-buying plan in jeopardy.
Option 2: Ask for a float-down
Another choice is to ask your lender for a float down option. This essentially gives you a pathway to a better rate in the case a drop occurs after you lock one in.
However, you have to pay for a float down and costs range from a quarter percentage point up to one percentage point of your loan amount, Simental states.
Option 3: Start your loan over
Lastly, you could cancel your mortgage transaction and start over with a new loan at a lower rate. Simental advises against this, though.
In addition to probably angering your loan officer, you’ll likely have to redo all your mortgage paperwork. Your lender could also refuse letting you out of your rate lock altogether.
“I personally don’t suggest this because you have to start a brand new set of disclosures, you have to fill out a whole new loan application, you have to make sure that you qualify with the specific bank you’re applying with. And you went with that other lender for a reason, right? You have to make sure you like this new loan officer,” he said.
Delaying the loan process could also push you past the agree-upon closing date in your purchase contract. And, unless the seller agrees to extend their timeline, this could see you losing the home and your earnest money, too.
Advice for borrowers
Buying a home and getting a mortgage typically make up the largest financial transaction of a person’s life. It only makes sense that borrowers want to do everything they can to get the lowest interest rate possible.
While you can choose to deploy several rate-lock options, the bottom line for home buying comes down to making sure you can afford it. “If you’re comfortable with that interest rate and that payment, I suggest you lock,” Simental said.
If you’re ready to buy a home, talk to a local lender and see what interest rate you qualify for and what loan type is best for you.