Purchasing a new home, particularly one under construction, can take many months. During this time, mortgage interest rates can fluctuate significantly, potentially increasing the cost of your loan. An extended rate lock is a commitment from your lender to hold your mortgage interest rate steady for an extended period—often 90 days, six months, or longer—until your home is ready to close. This lock protects you from rising rates and financial uncertainty throughout the construction process.
How Extended Rate Locks Work
Standard mortgage rate locks typically last 30 to 60 days, sufficient for most home purchases. However, new constructions often require a longer lock since closing can be delayed for months. When you request an extended rate lock, your lender will charge a fee (commonly 0.25% to 1% of the loan amount) to compensate for the risk of fluctuating rates. This fee is usually paid upfront and ensures your interest rate stays fixed regardless of market changes during the lock period.
For example, if you lock a 6.5% interest rate with a 180-day extended lock and rates rise to 7.5%, you still pay the original 6.5%. The lender assumes the risk of lost profit if rates climb.
Who Should Consider an Extended Rate Lock?
- Homebuyers of New Construction: Building a home can take from six months to over a year. An extended lock provides certainty and budgeting stability.
- Buyers Facing Complex Transactions: If your purchase involves selling an existing home or resolving title issues that delay closing, an extended lock mitigates rate risk.
- Rising Interest Rate Environment: When the Federal Reserve signals potential rate hikes, locking in a rate early can save thousands over the loan’s lifetime.
Costs and Considerations
The cost for an extended rate lock depends on the length of the lock and the loan amount. For a $500,000 loan, a typical fee might range from $1,250 (0.25%) to $5,000 (1%). Keep in mind this fee is generally non-refundable, even if you do not complete the loan.
Float-Down Option: A Valuable Feature
Some lenders offer a float-down option for an additional fee. This feature allows you to adjust your locked rate downward if market rates fall during the lock period, giving flexibility to benefit from lower rates while still protecting against increases. Typically, float-downs can be used once and require notification 30 to 60 days before closing.
Avoiding Common Pitfalls
- Shop Multiple Lenders: Fees and lock terms vary. Compare offers carefully.
- Monitor Lock Expiration: Construction delays are common; discuss extensions early to avoid losing your rate lock.
- Understand Float-Down Rules: Clarify eligibility, timing, and conditions before opting for this feature.
- Don’t Overpay: If purchasing an existing home with a quick closing, extended locks are usually unnecessary.
For more on mortgage rate guarantees, see our Interest Rate Lock guide. If you want to understand the related feature that allows adjusting rates down during the lock period, check our Lock-In Agreement explanation.
Frequently Asked Questions
What if my home isn’t ready before my lock expires?
You can often extend the lock for an additional fee, which may be charged daily or weekly. Without an extension, you risk losing your rate guarantee.
Is the extended rate lock fee refundable?
Almost always not. It covers the lender’s risk and administrative costs.
Can I get an extended rate lock for refinancing?
It’s less common because refinancing typically closes faster, but some lenders may offer this for complex refinance cases.
Sources:
- Consumer Financial Protection Bureau: What is a mortgage rate lock and how does it work?
- Investopedia: Mortgage Rate Lock: What Is It and When Should You Do It?
- NerdWallet: What Is a Mortgage Rate Lock?
