Lending Logic Lab Rate Lock Decision Worksheet

A rate lock fixes your quoted interest rate until closing. It protects you if rates rise before you close, and it costs you if rates fall or if the lock fee is more than the risk it removes. This worksheet puts a price on that risk, so you can compare it with the lock fee. It applies to mortgage refinancing and home equity loans.

How to use it

1. Enter the loan, the quoted rate and the lock fee. Enter 0 if the lender locks for free.
2. Enter how long the lock lasts and how many days you expect to need before closing.
3. Estimate how far the rate could move, and how likely a rise is. Then read the comparison.

Currency $ (US dollar)£ (British pound)€ (euro)₦ (Nigerian naira) Loan amountThe amount you will borrow. Quoted interest rate (%)The rate you would lock today. Loan term (years)For example 15 or 30. Rate lock feeTotal cost of the lock. 0 if free. Lock period (days)How long the lender will hold the rate. Days you expect to need to closeValuation, paperwork and processing time. Possible rise in rate (points)Your worst realistic case, for example 0.5. Possible fall in rate (points)Your best realistic case, for example 0.25. Chance the rate rises (%)Your own estimate. The chance of a fall is the rest. Years you expect to keep the loanBefore you sell or refinance again.

How it is calculated

• Monthly payment: the standard repayment formula, using the rate ÷ 12 and the number of monthly payments.
• Cost of a move = (new payment − locked payment) × months you keep the loan.
• Expected cost of floating = chance of a rise × cost of the rise − chance of a fall × saving from the fall.
• Lock beats floating when the expected cost of floating is more than the lock fee.
• Break-even chance is the chance of a rise at which locking and floating cost the same on average.

Assumptions and limits

• Nobody can forecast rates. The result is only as good as your estimates, so try a few different ones.
• Only two outcomes are modelled, a rise or a fall. The table shows other sizes of move.
• Payments are compared for the years you keep the loan. Differences in the remaining balance are ignored.
• Some lenders offer a float-down option or charge for lock extensions. Both change the answer, so ask what is included.
• If closing runs past the lock period, you may pay an extension fee or lose the locked rate. Allow a margin of a week or more.

General information only, not personalised advice. Results are estimates based on the assumptions listed above.