What Happens When a Mortgage Rate Lock Expires?

When you're preparing to refinance or purchase a new home, you may apply for a loan long before the closing date. Once the closing date is only a month or two away, the lender will allow you to lock in your interest rate for a certain number of days. However, if you must postpone closing past the rate lock's expiration date, the rate lock will no longer be valid.

Rate locks exist to protect borrowers from negative changes in market interest rates. It's generally up to the borrower to decide when to lock in the rate, as long as the closing date of the loan is in the near future. If the borrower believes that a lower rate is possible, he may wait to lock in. However, if the borrower thinks that the current rate is the best he will see, he can lock it in for a period of 10 to 60 days.

Rate locks always include an interest rate, but they may also include a certain number of prepaid interest points that the borrower will pay to qualify for that specific interest rate. When the lock expires, the borrower typically has two options: arrange an extension with the lender or look for a new combination of interest rates and points to lock in.

Depending on recent market activity, a lender may or may not allow an extension. If interest rates have risen significantly, the borrower may have no choice but to find a new rate. However, if interest rates have remained close to the same, the borrower can usually extend the rate lock for an additional fee. According to The New York Times, extension fees typically range from 0.10 percent to 0.25 percent of the loan balance.

Even if the lender is offering an extension, it isn't always wise to take it. If interest rates have fallen since the initial rate lock agreement, it may be better to shop for a lower rate. Borrowers can avoid dealing with rate lock expiration by floating the interest rate until the closing date is closer, but this approach is risky if the market is volatile. Borrowers must lock in the interest rate at least a few days before closing so that the lender has time to prepare the loan documents.