Mortgage Daily

Published On: December 15, 2022

What Happens if Interest Rates Decrease After Locking in a Mortgage Rate?

If you lock in a mortgage rate, and then interest rates climb, you get to maintain the lower rate you locked in. But what if you lock up a mortgage, and then interest rates decline?

Sadly, you cannot just unlock your rate. Your best choice is to inquire with your lender for a rate “float down,” albeit at an extra expense.

Refinancers may also choose to switch lenders at the last minute. However, this entails starting from scratch, so be sure that the new rate is low enough to justify the process.

Can a Rate on a Mortgage Be Unlocked?

A mortgage rate lock is an agreement between the borrower and the lender. Your lender cannot alter your interest rate as long as your mortgage closes by the agreed-upon date, even if current rates unexpectedly spike

This gives borrowers enormous peace of mind. Once the price has been fixed, there will be no further price rises.

After locking your mortgage rate, you cannot unlock it. However, there may be other ways to obtain a reduced rate once locked.

However, the arrangement is reciprocal. You must do more than cancel the rate lock and expect your lender to give a cheaper interest rate if rates unexpectedly drop.

In other words, the locked rate cannot be unlocked. However, there may be methods to escape a rate lock if interest rates drop significantly.

Your lender may be able to alter your rate if interest rates drop dramatically. “However, the price reduction must normally be at least one percentage point,” notes Jon Meyer.

Two Techniques for Obtaining a Lower Rate After Locking

After locking, there are often only two ways to potentially obtain a reduced interest rate.

  • Inquire with your lender about a “float down” option. You incur an increased closing fee in exchange for lower current market rates.
  • Cancel your loan request and change lenders. You leave your present lender and begin again with one who can offer you a better interest rate.

There are substantial advantages and disadvantages to both of these tactics. You face a substantial float-down fee, a significant delay, and more paperwork.

But if the savings from a reduced mortgage rate are substantial enough, these obstacles may be well worth it.

A reduced mortgage interest rate would lower your monthly payments saving you thousands.

So let’s examine these two alternatives in further detail.

Float-Down Choices

A float-down option or float-down provision is an agreement that can be established between you and your lender after the rate has been locked.

To lower your locked-in rate to current mortgage rates, you would pay an extra charge ranging from 0.5% to 1% of the loan amount.

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

Your rate reduction will rely on the current market conditions and your qualifications as a borrower.

Note that this charge is not payable during the float down. Instead, it is included in your closing expenses.

Float-Down Rules

Numerous creditors have float-down alternatives. However, policies and costs differ.

Typically, you must be able to reduce your mortgage rate by at least 0.25 percentage points to employ a float-down option. In addition, the float-down charge may cost up to 1 percent of the new loan amount.

In comparison to the amount of money you are likely to save in the long run, paying an additional 1% upfront is still a bargain. However, a float-down option is only sometimes advantageous. Your rate must decrease sufficiently to warrant the expense.

How Are Float Downs Utilized?

Suppose you had a $300,000 mortgage loan with an interest rate of 3.75%. Then you observe a decline in interest rates and decide to capitalize.

Keep in mind that most mortgages are held for less than 30 years. The median is around seven years. Therefore, while calculating your savings, you must consider the length of your stay in the residence.

Inquire to determine whether your lender provides a float-down option.

Asking for a float-down option before locking in your interest rate might be prudent if you are still in the shopping process but believe that interest rates will fall further in the near future.

Changing Lenders Following Lockup

The second possibility is that you lock in a mortgage rate, but your lender does not provide a float-down provision. Or your lender cannot provide you with a rate low enough to warrant one.

You still need to get out of alternatives.

The second approach to “unlock” your mortgage rate is simply jumping ship. You might withdraw your loan application and reapply with various lenders until you discover the lowest interest rate.

Changing lenders at the eleventh hour might result in substantial interest and loan fee savings.

Using the example from above, you might save more than $15,000 by securing a rate just a quarter of a percentage point below your fixed rate.

Keep in mind that if you quit your lender before closing the loan, the lender cannot punish you or levy a cancellation fee. Federal safeguards allow borrowers to drop out of a loan at any point before they close.

Should You Switch Lenders Following a Rate Lock?

After locking, you can switch lenders to get a cheaper rate. But ought you?

If you are refinancing your home, the answer might be “yes.” If you are a buyer, the likely response is no.

We only advocate canceling your loan application if you’re purchasing a property and closing shortly (within a month) (within a month). This method is typically more effective for refinancing.

“You may be better off applying simultaneously with two brokers. “Whether one has a better rate, then the other is just to check if underwriting can be completed faster,” explains Meyer.

The risks associated with switching lenders are particularly hazardous for homebuyers. Refinancers have fewer risks, but they should still comprehend the process:

  • If you cancel your home purchase application before closing, you might lose thousands of dollars in earnest money since, legally, the seller has the right to keep it if you miss the closing date.
  • Restarting your loan requires you to re-verify your credit and income and submit a new loan application.
  • Time: redoing the entire application procedure can take up to a month
  • There is a strong probability that you may be required to pay third-party expenses (such as the credit report and house assessment) again.

income, a bank statement loan, a down payment gift letter,

If you have unique loan concerns such as a low credit score, a low income, a bank statement loan, a down payment gift letter, or any factor that makes it more difficult for lenders to accept your loan, you may encounter additional complications.

If it was difficult to obtain approval in the first place, it is not worthwhile to abandon your application in pursuit of a slightly cheaper interest rate.

Because of these limitations, the lender-switch method is not great unless you’re between a rock and a hard place – tied in with a lender with high rates and no float-down option.

The risks are decreased when refinancing. Your house is not at risk, nor are you at risk of losing earnest money.

This is a decent option if you don’t mind more effort and waiting time (and a way to avoid the 0.5-1 percent float-down fee).

What Happens if My Rate Lock Expires Before Closing?

When you lock in a mortgage rate, you commit yourself to a “worst-case” situation.

  • If your loan closes after the rate lock expires and interest rates have increased, you will be charged a higher rate. “However, in certain instances, you may not be required to accept the higher rate if you pay a closing extension fee,” explains Meyer.
  • However, if your rate lock time has expired and rates have decreased, you will not receive the cheaper rate. You’llYou’ll close at the locked pace.

However, if interest rates have increased, many lenders may enable you to extend your lock.

There may be no cost to add a day or two, but a small price (0.125% to 0.25%) to add a week or two. If interest rates have lately skyrocketed, it may be prudent to do so.

If you fail to close on time, you may also be able to re-lock the same interest rate.

  • For example, if you locked in a mortgage for 30 days and discovered after a week that it would take 35 days to close, you may be eligible to re-lock the same loan for another 30 days. (“In this case, a 7-day extension charge will be less expensive,” notes Meyer.)

If rates have stayed the same or decreased, your lender should permit you to re-lock at no extra cost.

If rates have risen, you may have to negotiate a new lock. Or, take a risk that prices may decrease before your contract expires and re-lock at that time.

What Does It Mean for a Mortgage Rate to Be “Locked In”?

Locking in a mortgage rate implies agreeing to an interest rate and cost structure that binds you and your lender.

A mortgage rate lock comprises the yearly interest rate, fees, and monthly payment plan.

For instance, you may lock in 3.5% for a 30-year fixed-rate mortgage — meaning your lender promises you’ll pay 3.5% interest for the entire loan period, and it won’twon’t raise or reduce your rate unless you refinance.

Must I Lock in a Mortgage Rate?

You cannot close on a mortgage without first locking in an interest rate – you must do it, even if it’s an hour before the lender prints your closing paperwork.

All mortgage rate lock contracts include:

  • An “effective date” indicates when your rate lock expires.
  • An interest rate
  • A mortgage program, such as a 30-year fixed loan or a 5/1 adjustable-rate mortgage.
  • The cost of your interest rate (for instance, 1 point or 1% of the loan amount).

Although not all mortgage lenders need rate lock agreements to be in writing, it is in your best interest to have one.

You may use a tool such as DocuSign to lock in your rate in person, through fax, or online.

It is preferable to demonstrate that you secured X rate for Y number of days and to ensure that you are aware of your obligations. A signed agreement facilitates this.

Does My Loan Type Influence the Rate Lock on My Mortgage?

Government-backed and conventional loans function similarly to mortgage rate locking.

Government-backed loans such as the FHA loan, VA loan, and USDA mortgage are monitored by federal agencies, but private lenders have the last say on rates and rate lock regulations.

Nevertheless, certain loan types may take a bit longer to finalize, influencing your decision regarding when and how long you lock in your rate.

Ask your loan officer for a closing time estimate to minimize rate hikes in the days preceding loan approval and closing.



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