Locking vs. Floating Your Mortgage Rate

To mortgage folk across the country, it’s an age-old question: “Lock or float?” It’s a question loan officers and mortgage brokers get asked on a daily basis, often over and over again by panicked borrowers and first-time home buyers.

And it might just be the most important answer you come up with during the loan process, as it will determine the mortgage rate you ultimately receive.

How Locking vs. Floating a Mortgage Rate Works

• You get the option to lock or float your interest rate when you apply for a mortgage
• If you lock, the interest rate won’t change as long as you fund your loan before its expiration
• If you float, rates may go up or down until you finally lock it in
• Your loan officer or broker may be able to advise you on which move to make

When you submit a home loan application, you will be asked if you want to lock in your mortgage rate or float the rate. If you choose to lock the rate, you are guaranteeing yourself a certain interest rate on your mortgage.

So if the lender says you can lock in an interest rate of 6.25% on your 30-year fixed-rate mortgage today, and you’re happy with that, they can lock it in for you. This ensures your rate will not change, even if mortgage rates spike higher over the days and weeks after you lock.

At the same time, this means you won’t be able to take advantage of a lower mortgage rate, assuming they drop even more as your loan closing date approaches. Note that locks come with an expiration date, such as 15 days, 30 days, and so on. So you must fund before that date.

Conversely, if you choose to float your rate, you’re essentially telling the lender that you don’t like where rates are at, and want to hold out for better.

Lock or Float? Lock your Rate or Float your Rate...

• Floating a mortgage rate is inherently risky because no one knows what tomorrow holds
• It can be a dangerous game to play if you can’t afford a higher interest rate
• But you can potentially wind up with a lower mortgage rate if you do choose to wait
• One tip is the more time you have until closing, the greater your chances of securing a lower rate

When deciding between locking and floating, you need to assess your situation. Every borrower has a unique story, and every day is different, so there is no hard and fast rule here. Some borrowers may not be comfortable with “letting it ride.” While others may be market experts and have a good handle on the direction of mortgage rates. Generally, what’s bad for the economy is good for mortgage rates, which explains why they are so darn high at the moment.

If you prefer to sleep at night and “like” where mortgage rates are right now, locking might suit you better than floating. And if you think mortgage rates aren’t going to get any better, again, locking is probably the move. Additionally, if you can’t risk taking on a higher mortgage rate (think a DTI ratio on the brink), locking your rate would be very smart to avoid any future hang-ups or a denied loan application. Source

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