Should I lock or should I float?

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.

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 interest 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 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?

If you wait and lock at a lower rate, 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.

A Float-Down Might Be an Option Too

Aside from floating and locking, you might also be given the option to “float down” your rate.  Be sure to ask your broker or loan officer about their float-down policy when inquiring about pricing.

A float-down is an option that becomes available once you lock your rate to take advantage of potential interest rate improvements.  For example, say mortgage rates fall dramatically after you lock.  If they do, you could have the one-time option to float the rate down to current levels for a cost.

This allows you to take advantage of interest rate decreases if you want an even lower rate, despite already being locked in on an earlier date.

However, as noted, there is a cost to the float-down, and it’s typically fairly significant.  The cost of a float-down will range from bank to lender, and could run anywhere from .375% to .625% of the loan amount (or higher) to take advantage of current pricing.  So for higher loan amounts, it could be a pricey option.

Some lenders may offer to split the difference with you if rates drop after locking. So if rates are .25% lower than when you originally locked, they may lower your rate by .125% as a courtesy free of charge.

Others may renegotiate the lock just to keep your business if rates have really plummeted, so it never hurts to try to haggle a bit if that happens.

Just keep in mind that lenders generally have restrictions on when you can execute a float-down, how low the rate can/must drop, and how long the lock can be extended if at all.  The float-down option can usually only be applied once and it must occur before the lock expires when the loan is set to close.

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.