To mortgage men and women across the country, it’s an age-old question: “Lock or float?”
In fact, it could be the most important question a borrower will be asked during the loan process, as it will determine what mortgage rate they’ll eventually wind up with.
And the rate you pick will dictate what you pay each month for the next 30 years (assuming you don’t refinance), so it’s not a decision to be taken lightly!
How It All Works
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 5% on your mortgage today, and you’re happy with that, they can lock it in for you.
This ensures that 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 lower as your loan closing date approaches.
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 wait for better.
Or it could just be that your loan approval is still a month away, and you don’t want to lock prematurely and have to pay to extend your lock if it takes longer than anticipated to close.
Either way, your mortgage rate is subject to change until it is locked, so you’re taking a risk, whether calculated or not.
Are You Feeling Lucky?
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.
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 rates, which explains why they are so darn low at the moment.
If you prefer to sleep at night and “like” where mortgage rates are at the moment, 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.
On the other hand, if you think mortgage rates have room to fall, and you can stand to profit from it, you may choose to float your rate.
After all, mortgage rates continue to reach record lows seemingly every week, so why not wait it out a little longer if you’ve got time?
Instead of locking in a rate of 3.75% on a 30-year fixed, you might be able to take advantage of all the economic turmoil going on and wait for your rate to fall to 3.5%.
If that happens, you’ll save money each month in the form of a lower mortgage payment and a lot more over the life of the loan. You may also receive a larger lender credit to use for costly closing costs.
Regardless of what direction you choose, just be sure you understand the consequences of both locking and floating.
Tip: Most lenders will probably err on the side of locking your rate because they won’t want to have to explain to you why mortgage rates moved higher if they happen to get worse while floating.