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Can I unlock a mortgage if interest rates drop? Two ways to get a lower rate after you’ve locked

Gina Pogol
The Mortgage Reports contributor

What happens if you lock in a mortgage rate and then rates go down? 

One of the most nerve-wracking aspects of getting a mortgage is locking in your interest rate.

What if rates fall further after you lock? What if you don’t lock, and then rates rise? Can you get a do-over? Can you unlock?

Unfortunately, you can’t just “unlock” your interest rate and re-lock at current market rates. But you’re not out of options. 

If you’ve already locked a mortgage rate, talk to your lender about “float-down” options. There’s a chance you could still use this strategy to lower your rate before closing. 

Changing lenders last minute is also an option. But it means starting over from square one, so make the decision carefully and be sure your new rate is low enough to be worth it. 

Verify your new rate today (Oct 31st, 2020)

In this article:


What does it mean to “lock in” a mortgage rate?

Locking in a mortgage rate means agreeing to an interest rate and cost structure that binds you and your lender. 

A mortgage rate lock includes the annual interest rate, fees, and payment plan. For instance, you might lock in 3.5% for a 30-year fixed-rate mortgage — meaning your lender guarantees you’ll pay 3.5% interest for the whole loan term, and it won’t raise or lower your rate unless you refinance

You cannot close on a home loan without locking an interest rate — you have to do it, even if you wait until an hour before the lender prints your final documents.

All mortgage rate lock agreements contain:

  • An effective date, when your agreement expires
  • An interest rate
  • A specific mortgage program, like a 30-year fixed loan or a 5/1 ARM
  • The cost of your rate (for example, 1 point, which is 1 percent of the loan amount)

While not all mortgage lenders require rate lock agreements to be in writing, it’s better for you if it is. 

You can do it in person, sign and return a fax, or sign electronically with a service like DocuSign. 

It’s just better to be able to prove that you locked in X rate for Y number of days and to make sure that you understand what you’re committing to.

Verify your new rate today (Oct 31st, 2020)

    Related

Two ways to get a lower rate after locking 

A mortgage rate lock is a commitment between you and your lender. As long as you close by the agreed-upon date, your lender cannot change your rate, even if rates suddenly skyrocket. 

That’s great for borrowers — except that the commitment goes both ways. If rates suddenly fall, you can’t just back out of the rate lock and expect your lender to offer you a lower interest rate in return. 

There are just two ways you can get a lower rate if you lock in with a lender and then rates fall (more detail on both of these below): 

  1. Ask your lender about a “float down option”— you pay an extra fee at closing in return for the lower current market rates
  2. Cancel your loan application and switch lenders — you abandon your current lender and start over with one that can offer you a lower rate

There are huge benefits and risks to both of these strategies. 

You’re either facing a large float-down cost, or a big delay and added paperwork. 

But if the savings you’ll see from a lower mortgage rate are big enough, those hurdles may well be worth it. 

>> Related: Streamline refinance — get today’s rates with almost no paperwork

Float down options 

A float down provision or “float down option” is an agreement between you and your lender that can be made after you lock a rate. It lets you pay an additional fee — usually 0.5% to 1% of the loan amount — to drop your locked rate to current mortgage rates. For instance, a float-down provision on a $300,000 loan would likely cost around $1,500 (0.5%). 

Note that you don’t pay this fee at the time of the float down. Rather, it’s added to the rest of your closing costs.

Many lenders offer float down options. But their policies and fees vary.  

Oftentimes, you have to be able to drop your rate at least 0.25% to use a float down option. And the float down fee can cost as much as 1%. 

1% is still relatively cheap compared to the amount of interest you’re likely to save long-term. But a float down option isn’t always worth it. Your rate has to drop low enough to justify the cost.   

For example, say you’re getting a $300,000 loan and you’re currently locked in at 3.75%. 

Then you see rates plummeting and you want to take advantage. Here’s how the math looks — depending on how far rates have fallen and how much the float down costs:

Loan amount $300,000
Locked rate 3.75%
Float-down fee 0.5% ($1,500) 1% ($3,000)
New rate 3.7% 3.5% 3.7% 3.5%
Interest savings (30 years) $3,000 $15,200 $3,000 $15,200
Worth it? Yes Yes No Yes

Keep in mind, though, that most people don’t keep a mortgage for 30 years. The average is around 7 years. So when you calculate your savings, you need to factor in how long you’ll stay in the house. 

Here’s how the cost of a float down looks if you only keep your mortgage 7 years, instead of 30:

Float-down fee 0.5% ($1,500) 1% ($3,000)
New rate 3.7% 3.5% 3.7% 3.5%
Interest savings (7years) $3,000 $15,200 $3,000 $15,200
Worth it? Yes Yes No Yes

To find out whether your lender offers a float down option, simply ask. 

And if you’re still in the shopping phase but think rates might drop further in the near future, asking about a float down option before you lock might be wise — just as a precaution. 

Find and lock a low rate today (Oct 31st, 2020)

Switching lenders after locking

Here’s a second scenario: You lock a mortgage rate, then rates fall, and your lender doesn’t offer a float-down provision. Or, your lender can’t offer you a low enough rate to justify one. 

You’re still not out of options. 

The second way to “unlock” your mortgage rate is by simply jumping ship. You cancel your loan application and go back to square one — applying with multiple lenders till you find the lowest possible rate. 

Switching lenders at the last minute could help you save big on interest and loan costs. 

Using the example above, you could save more than $15,000 by finding a rate just 0.25% lower than your locked rate. 

If you leave your lender before the loan closes, it is not allowed to penalize you or charge a cancellation fee. 

Federal protections give borrowers the right to opt out of a loan at any time before they close. 

Should you change lenders after locking a rate? 

So, you can change lenders after locking to find a lower rate — but should you? If you’re refinancing your home, the answer may be yes. If you’re buying, the answer is likely no. 

We do not recommend canceling your loan application if you’re buying a house and closing soon (within a month). This strategy works better for refinancing. 

There are inherent drawbacks to switching lenders that make it dangerous for home buyers. The stakes are lower for refinancers, but they should still understand the process: 

  • Money down — If you’re purchasing a home and you cancel your application before closing, you could potentially lose thousands in earnest money because the seller has the legal right to keep it if you miss your closing date
  • Paperwork — Re-starting your loan means you need to re-verify your credit and income and do a lot more paperwork 
  • Time — Re-doing the full application process can take a month or more 
  • Fees — There’s a good chance you’ll have to pay third-party fees (like the credit check and home appraisal) twice

Other difficulties can arise if you have special loan considerations; e.g. poor credit, lower income, a down payment gift letter, a bank statement loan, or other attribute that makes it more difficult for lenders to approve your loan.

If it was challenging to get approved in the first place, it’s not worth throwing away your application to search for a slightly lower rate. 

Because of these challenges, the lender-switch strategy is not a great one unless you’re between a rock and a hard place — locked in with a lender that has high rates and no float down option. 

Of course, the stakes are lower if you’re refinancing. Your home is not on the line, and you don’t stand to lose any earnest money. 

If you don’t mind some extra work and waiting time, this might be a good solution for you (and a way to avoid the 0.5%-1% float down fee).

Verify your new rate (Oct 31st, 2020)

What if my mortgage rate lock expires?

If you lock in a mortgage rate, you’re committed to a “worst case” scenario. As in, if your loan fails to close before your rate lock expires, and rates have gone up, you’ll pay the higher rate. And once you lock, you can’t really unlock a mortgage.

But if your rate lock expires and rates have gone down, you don’t get the lower rate. You’ll close at the rate you locked.

However, many lenders will allow you to extend your lock if interest rates have risen. 

It may even cost you nothing to add a day or two, and a small fee (0.125% to 0.25% of the loan amount) to add a week or two. That’s probably worth doing if interest rates have shot up recently.

You may also be able to re-lock the same rate if you don’t close on time.

For instance, if you locked in a mortgage for 30 days and after a week, you realize that it will take 35 days to close, you may be able to relock the same loan with a new 30-day period.

If rates have not changed or have fallen a bit, your lender should let you re-lock at no additional charge. 

If rates have risen, you may have to negotiate a new lock. Or take a chance on them coming down before your expiration and re-lock then.

Mortgage rate lock FAQ

What happens if my mortgage rate lock expires before closing?

If your rate lock expires before closing, you’ll have to re-lock a rate in order to close the loan. If rates haven’t moved, it will likely be the same rate you originally qualified for. And if rates rose during the lock period, your rate will likely go up. But if rates have fallen, you will not get a lower rate. You’ll likely still get the original rate you locked at.

Can you lock in a mortgage rate with more than one lender?

Yes, you can lock in a mortgage rate with more than one lender. Some borrowers decide to lock a rate with Lender 1 and let their rate float with Lender 2. That way, if rates fall, they have a backup. They can lock in a lower rate with Lender 2 and cancel their application with Lender 1 with fewer consequences.

Most lenders don’t charge any kind of rate lock fee (unless you’re getting an extra-long lock) and there’s no cancellation fee. However, look out for credit report and appraisal fees which happen quickly after the rate lock. You may have to pay them twice if you go with Lender 2 since these items are not usually transferrable.

Can you change lenders after locking a rate?

Yes, you can change lenders after locking a rate. But you’ll have to start the application process over with your new lender. That means getting pre-approved, submitting all your documents, and waiting for underwriting — twice. All in all, closing a mortgage or refinance usually takes a month or more. So if you’re anywhere near the closing date on your original application, consider your options very carefully before deciding to change lenders. 

Can you negotiate mortgage rates?

Yes! You can negotiate mortgage rates with your lender. This is easiest to do when you’re in the shopping-around phase. You can get multiple rate quotes and sometimes use a lower rate as leverage with the lender you want. If you’ve already locked and rates fall, you might still have room for negotiation. Lenders invest time and money in setting up mortgage applications, and they lose out if borrowers bail. So they may be willing to work with you. It’s worth an ask.

>> Related: How to negotiate a better mortgage rate for your home loan 

Can I back out of a mortgage rate lock? 

You can back out of a mortgage rate lock, but there are consequences. Backing out of a rate lock means giving up the application you’ve put time and money into. You’ll have to start your mortgage application over from the start (whether it’s the same lender or a new one), and you’ll likely have to re-pay fees like the credit check and home appraisal. If you’ve already locked a rate and they fall, ask your lender about float down options instead of backing out. 

Should I lock in my mortgage rate today?

Mortgage rates are breaking records in early 2020, falling into the low 3s — and even the 2s for some lucky borrowers. 

There’s a chance that rates could go lower still. But if you like to play things safe, now is an excellent time to lock. 

You could guarantee yourself a 30-year rate lower than almost all borrowers in U.S. history. (Really, it’s not an exaggeration.)

And if you think rates still have a lot further to fall, there’s always the option of locking with a lender that offers a float down provision, as a safeguard. Shop around and compare your options today. 

Verify your new rate (Oct 31st, 2020)

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