Lock Your Interest Rate or Let it Float?

Learn When to Lock Your Interest Rate and When to Let it Float

When you're shopping for a mortgage, one important decision you have to make is whether to lock in an interest late with the lender or to let the rate float.

A rate lock is a commitment between you and the lender that the interest rate you agree to is guaranteed, no matter if interest rates rise or fall, from the time the lock is made until the loan closes. Rate locks are only valid for a specific period of time. In most instances, the interest rate you are quoted comes with a 30-day lock.

Rate locks come in 15-day increments. A 30-day rate lock is the standard period your rate is locked on almost every loan rate you see advertised. Interest rates usually adjust ?th of a point, for every 15-days you lengthen or shorten your lock. For example, if you select a 15-day rate lock, then you're rate will be ?th lower than the standard rate. If you choose a 45-day lock, it will be ?th higher.

Get a Rate-Lock Confirmation in Writing

When you submit a loan application, you may or may not be locking in a rate. It all depends on how your lender works. Some lenders require that you have a formal appraisal on record and have supplied all the necessary supporting documents to get approved for the loan, before they will allow you to lock a rate. It is not always clear from the Good Faith Estimate (GFE) you receive, as it is currently formatted, whether your interest rate listed is locked or not. It is your responsibility to make sure that you get confirmation that your rate is locked, in writing.

How Long Does a Rate-Lock Last?

It is also your responsibility to understand how long your rate lock lasts and to compare that to how long you expect your loan to take to close. Pin your loan officer down. Find out how long loans are taking to run through the system. If your lender is taking 50 days to close the average loan, then you locking in a 30-day rate is not the right decision. Don't be lured to sign up with a lender, based on its 30-day loan lock rate. A loan lock is not a commitment that your loan will come through at the quoted rate. If there is a problem that causes the approval process to run past the period for which you've locked in your rate, you're probably going to be asked to pay for the lock extension

If rates drop significantly, you can switch to another lender, although this will cost you time and money. You will be starting from scratch with a new lender and will have to pay for another appraisal, because your last appraisal belongs to the lender, not to you (even though you paid for it). If you will save more money than you will pay in extra costs, it may make sense to switch lenders. Sometimes, when you have a chance to finalize a loan, it is more important to close the deal than to search for every dollar you can save. This is especially true in a purchase mortgage application, when you need your loan funded by a certain date in order to buy the home.

You can select to lock the rate for a shorter time, 15 days, and get a better interest rate, but you have to be certain that the loan will close in that period or you will pay a fee. Similarly, you can lock in a rate for a longer period, such as 45 or 60 days. If you choose to lock in for a longer period, you will pay a premium by having a slightly higher rate.

Receiving an interest rate quote from a lender is not the same as having your rate locked. To lock your rate, you need to submit a formal loan application. To make sure that you and the lender are on the same page, always get confirmation of your rate lock in writing. This will also specify the date when the lock expires.

Letting Your Rate Float

When you choose to "float," it means that you choose not to lock in a rate. Floating leaves you open to risk. It can work to your benefit or to your loss. Of course, if the rate falls, you gain, by being able to take advantage of the lower rate. If it rises, however, you will have a higher rate and a higher monthly payment. When you choose to float you are essentially betting that the rates will be lower when the time comes to close the loan. Floating, in my opinion, is only suitable if you have a high tolerance for risk.

Locking for a Purchase vs. a Refinance

You should approach the question of locking a rate or choosing to float differently when shopping for a purchase mortgage or when shopping for a home loan refinance. The reason for this is that the purchase borrower faces a greater risk, when not locking in the rate, mostly because the borrower does not already own the home. If you are buying a home and qualify for the loan based on obtaining a certain monthly payment, in relation to your debt to income ratio, you could risk losing the loan if the rate and payment rise. Losing out on an opportunity to buy a home you desire is a risk that many do not want to take.

When you are refinancing, the considerations of whether to lock or float are different. You are in a home that you own already and have been making the payments on that loan. The goal of the refi is likely to improve your rate and lower your monthly payment or to take some cash out of the property for home improvement, debt consolidation or some other personal need. Still, in a refi loan you also have to meet the lenders debt to income criteria. You don’t want a deal to slip away due to having the interest rate and payment rise.

Rate-Lock Strategy

I have seen many people chasing the lowest rate possible. That can be a never ending chase. The borrower waits for rates to drop and it does not, he can end up letting a good deal slip away. It is natural to want to get the best deal possible. We all want to buy something at the cheapest price and sell at the highest price. To me, question you should ask yourself is, "Am I getting a deal that improves my position?" not, "Am I getting the best deal ever?" Don’t let the perfect be the enemy of the good.

There is a cliché that when rates are rising they take the elevator, but when they are falling they take the escalator. This means that rates tend to drop incrementally when falling and rise rapidly when rising. My standard recommendation is to lock in a rate if it is a good deal for you. Crunch the numbers. If the interest rate and payment that you are offered strongly improves your position, take advantage of the opportunity while it is there. Simply put, locking your rate gives you a sure thing. To me, the peace of mind of a sure thing more than offsets the risk that rates will drop and I will have missed the best deal out there.