When you are shopping for a home and a mortgage, the process can take anywhere from a few weeks to a few months. As you wait for your closing date, you will have a choice to make about how to handle your mortgage loan. Your choice: do you want to lock in your interest rate or do you want to let it float?
Locking in vs. Floating
When you lock in your interest rate, you get a guarantee from a lender that you will be able to receive a loan at a promised interest rate. The lock-in term typically lasts for a pre-defined period of time- usually between 30 and 90 days- from the time you apply for your loan until the time when you close on your loan. As long as you finalize your purchase and take the loan within that time frame, you will have the loan at the promised rate and terms. This means that if you locked in a rate at 3.5 percent for 60 days and interest rates went up to 4 percent, you would still receive your loan at 3.5 percent as long as you closed on your loan within 60 days.
When you let your rate float, on the other hand, your interest rate adjusts as the market rates adjust. If you initially applied for your mortgage and interest rates were at 3.5 percent but you didn’t finalize your application and get your loan commitment and closing date until 2 months later when interest rates were at 4 percent, you would not be able to get the 3.5 percent rate that was available when you initially started shopping for a mortgage. Of course, on the other side of the coin, if interest rates dropped to 3.2 percent, you would get a lower interest rate than when you initially began the process of shopping for a loan.
When to Lock In?
Knowing exactly when to lock in your interest rate and when to let it float can be challenging. There are several key factors that need to be considered when deciding whether to lock in or let the rate float. The first factor is whether there is any cost associated with locking in your loan. The second factor is whether market interest rates appear to be changing or fluctuation and whether trends suggest that they will move up or down. The size of your loan can also play a role in whether or not to lock in, as a slight increase or decrease in interest rates can make a much bigger difference with a larger loan.
While it is impossible to determine conclusively whether interest rates will move up and down since it is impossible to predict the future, it is important to remember that in order for locking in to be worthwhile, interest rates would need to move enough to make the cost of locking in worthwhile.
You may also wish to consider speaking with your lender to determine if you have the option to both lock and float your loan. This is sometimes referred to as a “float-down” option. It allows you to lock in your loan rate but also to float your rate downward if interest rates decline. This removes one of the risks of locking in: the risk that you will lock in a rate and then interest rates will decline and you will actually be left with the higher rate. A float and lock program or float down program is not available from all lenders and it is important to check both the availability of this type of program as well as the costs and fees associated with the float down option before deciding if this is the right choice for you.