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When you’re buying a house, you have more to consider than just which property to purchase. You’ll need to understand the mortgage process, including if and when you should apply for a rate lock.
Let’s explore what a mortgage rate lock is, how it can protect you from fluctuating interest rates and how Pennymac’s mortgage rate lock program offers added benefits to homebuyers.
What Is a Mortgage Rate Lock?
A rate lock, also called a locked-in rate and rate protection, is a guarantee from a mortgage lender to give you a set interest rate (often the current market rate) when you apply for a mortgage. It guarantees a specific interest rate for a period of time, allowing you to close on a property without worrying about the mortgage rate changing.
When you lock in an interest rate, you are locking in pricing for that day. For example, if you lock in a 30-year fixed rate but then decide you want to do a 20-year term instead, you would still be able to take advantage of the interest for the day you locked.
If you don't secure your interest rate through a rate lock, increasing rates might necessitate a larger down payment or require you to pay points at closing to stay within your desired monthly mortgage payment budget.
What Is a Float-Down Loan Option?
While locking a rate can protect you from future rate increases during the underwriting and loan processing period, there is a chance the rate could also drop. A mortgage rate lock float-down enables you to lock in a rate during the underwriting period and have it reduced if market interest rates fall.
To protect yourself, whether rates go up or down, consider a lender that offers a rate lock with a float-down option. For example, Pennymac’s Lock & Shop program allows Pennymac customers to lock their rate for up to 90 days. It differs from a typical rate lock since you lock in the rate while shopping for a house—with the intention that you’ll find one in the next 60 days or so—and lock the rate once you go under contract.
A BuyerReady Certification is Pennymac’s unique loan certification process that can tell you the mortgage amount you could qualify for. It’s a great first step in your home-buying journey. Not only will you get as close to a mortgage as possible without actually finalizing it, but it qualifies you for Lock & Shop, which provides additional security and flexibility as you go through the underwriting process. You can lock in your rate before you get into contract with a seller, potentially saving you thousands of dollars in the lifetime cost of your new mortgage.
When Should You Lock Your Mortgage Rate?
Most people lock their mortgage rate after they’ve signed a purchase agreement for their home or when they begin the refinance process. But ultimately, it’s difficult to advise when you should lock your mortgage rate as rates can fluctuate on an hourly and daily basis, and the mortgage rate you’ll receive depends on your credit score and other factors.
Nobody can predict when mortgage rates will rise or fall. The best you can do to ensure a competitive rate is to research the recent history of mortgage rates in your area, determine if mortgage rates are rising or falling and lock in the rate as soon as you feel ready.
Don’t hesitate to ask a Loan Expert for advice — they are a great information resource.
Why Mortgage Rates Fluctuate
Numerous economic factors contribute to mortgage rate fluctuation, such as inflation, the rate of economic growth, housing market conditions and the Federal Reserve monetary policy. The Federal Reserve is responsible for determining federal funds rates. This target interest rate helps determine how expensive it is for banks to borrow money from other banks. The higher the federal funds rate, the more banks must charge in mortgage rates to recoup their expenses.
How Long Is a Mortgage Rate Lock Good For?
Rate locks last for a set period of time. Generally, you have the option of a 30-, 45- or 60-day period. Extended periods are possible — with Pennymac Lock & Shop, you have up to 90 days.* Once your rate lock period expires, the originally agreed-upon interest rate is no longer guaranteed. You'll need a rate lock extension to maintain it, but this comes at an additional cost that increases with the length of the extension. However, Pennymac will cover the extension cost if the lock expires due to a delay on our end.
Considerations on Selecting the Right Rate Lock Time Period
When deciding how long to lock your rate, it is important to select a duration long enough to cover your close of escrow date. It might be a good idea to ask your lender about their average times to help ensure you’ve picked a period of adequate length.
The Benefits of a Mortgage Rate Lock
The paperwork and processing involved when buying or refinancing a house often takes several weeks. Because interest rates can fluctuate daily, the rate available when you start the mortgage process will probably be a little different than the rate available when your mortgage is finalized.
Since mortgages involve large amounts of money and are paid over extended periods of time, even slight fluctuations can quickly amount to thousands of dollars. By locking in your mortgage rate, you protect yourself from the possibility of paying higher amounts should mortgage rates rise.
The Downsides of a Mortgage Rate Lock
While a rate lock has many advantages, it also comes with a risk. The most significant is that if interest rates fall during the lock period, you can’t take advantage of the lower rate. On the flip side, if interest rates rise, they are shielded from a higher rate environment.
To ensure that you’ll continue to benefit from favorable market conditions even after committing to a rate, consider using a lender that offers a float-down option on purchase loans, such as Pennymac’s Lock and Shop.
The Process of Locking in Your Mortgage Rate
The actual rate-locking method will vary by lender, so make sure you talk to your loan officer about how to do a lock. If your loan officer doesn’t mention a rate lock, you should ask for one when you’re ready to lock. While you have hopefully already done your homework when selecting your lender and locking in your rate, now is a good time to check about available rate lock periods and whether there is a rate lock fee. At Pennymac, you can start the Lock & Shop rate lock process with float-down provision after becoming BuyerReady Certified.
It’s also important to know that rate lock terms can be impacted if the information provided on your application changes, such as the property appraisal, your credit score, income or employment or if there is a revision to the loan itself, such as length or type of mortgage.
Is a Rate Lock Right for Me?
Rates are constantly fluctuating, similar to how the stock market moves up and down. The rate fluctuations that can happen during the loan underwriting and processing time period may seem small, but those changes can be enough to cost you or save you thousands of dollars over the life of your mortgage. Obtaining a mortgage rate lock with a float-down option provides peace of mind. If rates increase, you’ll be protected; if they decrease, you can take advantage of the lower rate.
Pennymac can help you prepare for your home-buying journey with confidence. Get BuyerReady Certified to understand how much you can borrow, then protect yourself from future rate increases before you get into contract with Lock & Shop. Have more questions about rate locks or mortgages? Contact a Pennymac Loan Expert today.
*Lock & Shop Program allows consumers who have a Pennymac BuyerReady Certification for a purchase loan with Pennymac to lock a rate prior to locating a property. The program requires a non-refundable fee of $595 due at the time of the rate lock. Consumers with a Pennymac BuyerReady Certification for a purchase loan with Pennymac must meet appropriate underwriting conditions to obtain a mortgage loan. Consumers may choose between a 60-day, 75-day or 90-day lock period. Consumers must initiate a mortgage loan application for a specific property and be under purchase contract for the property at least 30 days prior to lock expiration in order to extend the locked rate. All rate lock extensions are subject to Pennymac’s standard rate lock extension fees. After the rate lock and subject to favorable market conditions, consumers may be eligible for a one-time reduction in rate once the loan application for a specific property has been initiated (0.50 % maximum reduction in interest rate allowed). Eligible loan products are Conventional Fixed, Conventional ARM, FHA Fixed and VA Fixed. Program excludes Jumbo, refinance, third-party and in-process loans. Program subject to termination in Pennymac’s sole discretion and without notice.
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Meet Our Contributing Editors
Bradley Thompson and Afton Lambert are Contributing Editors for Pennymac’s consumer content and are exemplary leaders within the mortgage industry space. Both experts take pride in helping our customers achieve and sustain their aspirations of home.
For over 13 years, Bradley has achieved success as a high performer in various leadership roles including consumer direct sales and mortgage fulfillment positions.
With over 10 years of mortgage experience, Afton started her career as a top performing Loan Officer, before transitioning into her leadership role, where she has recruited, hired and trained Loan Officers.
