November 28, 2021

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Can I unlock a mortgage if interest rates drop? | 2 Strategies

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

If you lock a mortgage and then rates rise, you’re in luck: You get to keep the lower interest rate you locked in. But what if you lock a mortgage and then rates fall?

Unfortunately, you can’t just unlock your rate. Your best option is to ask your lender about a rate ‘float down,’ although this will cost you an additional fee.

Switching lenders last minute is also an option for refinancers. 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. 

Find a lower rate with a new lender (Jul 15th, 2021)

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Can you unlock a mortgage rate?

A mortgage rate lock is a commitment between you and your lender.

As long as your home loan closes by the agreed-upon date, your lender cannot change your rate — even if current rates suddenly skyrocket. 

This provides great peace of mind for borrowers. Once you’ve locked, there won’t be any surprise price increases.

However, the agreement 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 other words, you can’t ‘unlock’ your rate after locking. But there may be ways to get out of a rate lock if interest rates fall substantially.

Two strategies to get a lower rate after locking

There are just two ways you could potentially get a lower rate after locking.

  1. Ask your lender about a “float down option” — You pay an additional cost at closing in return for getting 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. 

After all, if you keep your loan for years, a lower mortgage interest rate could save you thousands in the form of lower monthly mortgage payments.

So let’s take a closer look at these two options.

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.

You’d pay an additional fee — usually 0.5-1 percent of the loan amount — to drop your locked-in rate to current mortgage rates.

For instance, a float-down provision on a $300,000 loan would likely cost around $1,500 (0.5 percent of the loan amount). 

The amount your rate will be reduced depends on the current market and your qualifications as a borrower.

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.

Float down rules

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

Often, 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 percent of the new loan amount. 

Paying an additional 1 percent upfront 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.   

How do float downs work?

Say you’re getting a $300,000 mortgage 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) 1.0% ($3,000)
New Rate 3.70% 3.50% 3.70% 3.50%
Interest Savings (30 Years) $3,000 $15,200 $3,000 $15,200
Worth It? Yes Yes No Yes

Keep in mind that most people don’t keep a mortgage for 30 years. The average is around seven 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 seven years instead of 30:

Loan Amount $300,000
Locked Rate 3.75%
Float Down Fee 0.5% ($1,500) 1.0% ($3,000)
New Rate 3.70% 3.50% 3.70% 3.50%
Interest Savings (7 Years) $1,030 $5,100 $1,030 $5,100
Worth It? No 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. 

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 could cancel your loan application and go back to square one, applying with multiple lenders until 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 a quarter percentage point lower than your locked rate. 

If you leave your lender before the loan closes, the lender 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. 

Find a lower rate with a new lender (Jul 15th, 2021)

Should you change lenders after locking a rate? 

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. 

The drawbacks to switching lenders are especially 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 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 like poor credit, lower income, a down payment gift letter, a bank statement loan, or another attribute that makes it harder 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 percent float down fee).

What if my mortgage rate lock expires before closing?

Once you lock in a mortgage rate, you’re committed to a “worst case” scenario.

If your loan fails to close before your rate lock expires, and rates have gone up, you’ll pay the higher rate. But if your rate lock period 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 cost you nothing to add a day or two, and a small fee (0.125-0.25 percent 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 at 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 re-lock the same loan with a new 30-day period of time.

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.

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 monthly 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.

Do I have to lock a mortgage rate?

You cannot close on a home loan without first locking in 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 rate lock period 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 to have a written agreement. 

You can lock your rate 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 you understand what you’re committing to. A written agreement makes this easier.

Does my loan type affect my mortgage rate lock?

Mortgage rate locks work more or less the same with government-backed and conventional loans.

Government-backed loans are overseen by federal agencies such as the FHA, VA, and USDA, but private lenders still have the final say on rates and rate lock policies. 

That being said, some loan types may take a little longer to close which could affect your decisions about when — and for how long — to lock in your rate.

Ask your loan officer for a closing time estimate so you can avoid any possible rate increases in the days leading up to loan approval and closing.

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, your new rate will likely be the same rate you originally qualified for. If rates increased 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 in.

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. 

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 more than a month. 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. Many first-time homebuyers don’t know this. 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.

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, and you’ll likely have to re-pay fees like the credit check and home appraisal. Plus, you could put your entire homebuying process in jeopardy because your new loan application will likely delay the closing date listed in your contract. If you’ve already locked a rate and they fall, ask your lender about float down options instead of backing out. 

Is it smart to lock in a mortgage rate?

Yes. Locking in a rate protects your loan application from interest rate fluctuations, which happen all the time. It also allows your lender to finalize your loan. And, a locked-in rate lets you calculate your monthly payment before finalizing your loan. But before locking in your rate, make sure you understand your lender’s rules and fees.

Can my loan amount change after the rate lock?

No. Your locked-in rate applies to your loan’s specific details — including your loan amount — so you can’t change the loan amount after locking in. Check with your loan officer before locking in a rate if you anticipate making significant changes to your loan application. 

Does it cost anything to lock in a rate?

Most lenders won’t charge you for locking in your rate because the cost is factored into your loan’s fees and interest. But if you need an unusually long rate lock period — 60 days, for example — your lender may charge an additional fee that’s included in closing costs. You may also pay additional costs for extending a rate lock. Most lenders measure this cost as a percentage of your loan amount (0.25 percent for example).

Should I lock in my mortgage rate today?

Mortgage rates repeatedly set record lows in 2020, falling into the low 2s for some lucky borrowers. 

Rates have rebounded a little since then, but they’re still at historic lows. Today’s borrowers can find cheaper home financing than almost all borrowers in U.S. history (really, that’s not an exaggeration).   

But if you’re still not comfortable locking in quite yet, 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 (Jul 15th, 2021)

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