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Can I unlock a mortgage if interest rates drop?

Gina Pogol
Gina PogolThe Mortgage Reports Contributor

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One of the most nerve-wracking aspects of getting a mortgage is locking in your interest rate. What if rates fall after you lock? What if you don’t lock, and then rates rise? Can you get a do-over? Can you unlock a mortgage?

  • A mortgage rate lock involves a commitment on both sides — both you and your mortgage lender agree to complete the transaction at the agreed-on rate, as long as your loan closes during the lock period
  • However, if you close your loan after the rate lock expires, most lenders will not give you a lower rate, even if interest rates have fallen
  • There are two ways of being confident when you lock — apply with more than one lender, or choose a float-down option

This article explains what happens when you choose to lock or float your mortgage rate, what can happen, and what you can do about it.

Verify your new rate (Oct 18th, 2018)

What does it mean to “lock” a mortgage?

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

Locking in a rate means agreeing to an interest rate and cost structure that binds you and your lender and requires a commitment from you both. A lock contains:

  • 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)

Related: When should I lock in my mortgage rate?

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.

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 (.125 percent to .25) to add a week or two. That’s probably worth doing if interest rates have shot up recently.

Related: How to choose the right closing date

If during your lock period, you realize that you won’t be able to close on time, you may be able to re-lock the same rate. 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.

Protecting yourself from mortgage rate changes

One school of thought is to find an interest rate, program and mortgage lender you can live with, then “set it and forget.” Don’t keep torturing yourself by checking current mortgage rates, or mortgage lock recommendations. Just do it and be okay with it. And do everything you can to make sure your mortgage closes on time.

The other school is more “control-freakish.” These borrowers may choose to apply with more than one lender, which can double the “fun” (and appraisal fees). With this method, you can lock in one loan, float the other, and ultimately choose the one with the better rate when it’s time to close.

Related: Best day of the week for locking a mortgage rate

Prepare to jump through a lot of hoops and to make a lot of people angry. And it can backfire; all those credit reporting fees, title searches and additional appraisals may increase your costs while saving you nothing if rates don’t change.

The other way is to pay for a “float-down” option. The float-down allows you to nail down a rate today, and if the going rate is lower when it’s time to close, you’ll get the better deal. It is the closest thing to being allowed to unlock a mortgage.

Float-downs usually have some restrictions, such as the point at which you can claim a lower rate. Or the rate may have to drop at least .25 percent before you can change your lock. The cost of a float-down depends on the length of the lock and you normally pay for it upfront.

Negotiating with your lender

Mortgage lenders hate it when they have a client with a locked loan closing in a few days, and then interest rates drop. They don’t want to lose you if they can avoid it. So your lender may be willing to split the difference with you between the new, lower rate, and the higher rate you have locked.

It probably beats starting over and going through the whole lock/float crisis again with a new lender, anyway.

Verify your new rate (Oct 18th, 2018)