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Should You Lock in or “Float” Your Mortgage Rate?

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When it comes time for you to shop for a mortgage, you’ll be faced with plenty of options, one of which is whether to “lock” or “float” your mortgage rate. What do each of these mean, and what are their differences? More importantly, which option is best for you?

Locking Your Rate

Locking in your interest rate essentially means that you will be bound to a specific interest rate throughout the term of your mortgage. You and your lender have a specific window within which to close the loan, which is typically anywhere between 15 to 60 days.

If you lock in your rate within this time period, that is the rate you will be bound to throughout the mortgage term. It will always remain the same, even if the market rate fluctuates. A locked-rate mortgage essentially means that you are guaranteed a specific interest rate on your mortgage. Your interest rate will not change, even if mortgage rates dip or spike over the term of your mortgage.

This is obviously advantageous if rates increase at some point. However, it also means that you will miss out on potential savings if the rates decrease.

It’s important for you to understand the difference between a rate “quote” versus a rate “lock.” A lender may quote you a certain rate when you apply for a mortgage, but that doesn’t necessarily mean that’s the rate you will be able to lock into. The rate can change from the time you’re quoted to the time your mortgage closes. Be sure that you fully understand whether or not you’re locked in; if you are, confirm what the interest rate and terms are in writing.

Borrowers often choose to lock in their rates because they like the peace of mind knowing that their monthly payments will always stay the same. This makes it a lot easier to budget. If your tolerance for risk isn’t very high, then locking in is likely a more sound option for you.

Floating Your Rate

If you choose to float your interest rate, you are assuming the risk that the rate will either increase or decrease at some point before your mortgage closes. Obviously, if rates drop, you will benefit; on the other hand, your lender will benefit if rates rise. If you are not locked in and “float” your rate instead, you need to be willing to assume this inherent risk.

During the time frame within which you and your lender have to close the home loan, the rates can rise, fall, or remain where they are. The longer this time frame is, the higher the chances of fluctuation in the interest rate.

If rates have been on the decline lately and are anticipated to continue on this downward trend, you might want to consider floating your rate if you believe rates will be lower by the time your mortgage closes compared to what they are today. This is the predominant reason that most borrowers choose to float their interest rate on their home loan. If interest rates have been on the decline, floating your interest rate makes sense, depending on the length of time that you have to lock in the rate.

If the rate drops, you can either choose to continue to let it float, or get in touch with your lender to lock the rate. On the other hand, if the rate starts rising, you will need to decide if you want to risk letting your rate continue to float, or to lock it in now to avoid any further potential increases.

Floating your rate might make sense if you are only planning on keeping your home for a short period of time, in which case you will only be keeping your mortgage for a short time period.

You should understand the potential consequences of letting your rate float too high. If rates rise so high that you will no longer be able to afford your monthly mortgage payments as a result, you are essentially “floating” yourself out of your mortgage. At this point, your lender will likely not approve your home loan, so make sure you are very vigilant with the interest rates if you choose to float your rate.

Locking With the Option to “Float Down” the Rate

You lender may be willing to extend a locked-in rate with the option for you to float the rate down if interest rates happen to decrease at some point during the lock-in period. This can give you the opportunity to take advantage of a lower rate and protect against an increase.

This type of arrangement does come at a cost, as it is typically more expensive than a locked-in rate mortgage without the option to float down the rate. Consider the costs associated with such an option before choosing it, if your lender offers it at all.

The Bottom Line

Consider what your specific goals are, how high your level of risk tolerance is, and how interest rates are currently behaving before you choose between locking or floating your mortgage rate. Your real estate agent and mortgage specialist will be able to fill you in on the current market to help you make a more sound decision.