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Lock or Float: Choosing the best mortgage strategy for homebuyers

When deciding whether to lock or float a mortgage interest rate, homebuyers need to weigh market conditions, personal risk tolerance, and the stage of their homebuying or home refinancing journey. Here’s a breakdown of each strategy to help buyers and homeowners make an informed decision:

What does it mean to lock or float a rate?

• Locking a rate: Secures a mortgage interest rate for a specific period (usually 30-60 days). Regardless of market fluctuations, the buyer keeps the locked-in rate. A mortgage rate lock protects you - a borrower from rising interest rates while buying a new house or refinancing current mortgage – which can take weeks or even months.  Locking a rate now could mean 30 years of low interest rates on your home loan. However, some people wonder if there’s a chance to save even more money by letting the rate float during the mortgage process while waiting to take out a new mortgage or refinance your current one.  Rate locks are not free. Lenders build them into the cost of the mortgage. The longer the rate lock, the higher the cost for the borrower and the lender. Paying for an extended rate lock might not be money well spend given the uncertain time until closing.

• Floating a rate: Allows the interest rate to remain unfixed, giving buyers the opportunity to take advantage of potential rate decreases before closing. Floating rate locks are options for borrowers who want to lock in the current rate with the benefit of getting a lower interest rate should they fall.  If you are planning to stay in the home long-term – you will have more to gain from a floating rate lock that translates into a lower rate (assuming that rates are in downward trend). However, in this efficient market – no one has that crystal ball that can predict the future). Bottom line is if you qualify for a rate and you are happy with it - LOCK IT. I do not recommend floating your rates when buying or refinancing your home because floating rate lock can be a costly gamble.  Buying a home or refinancing your mortgage is stressful enough as it is that you should leave gambling in Los Vegas only. As soon as you can lock your rate and you are happy with it – execute it.  Once you locked in your rate – the clock starts ticking: 

1. Please respond to your loan originator with any requests promptly. Your procrastination of 3 to 5 days in providing the requested documents or information can easily be amplified to 1 or 2 weeks delay down in the chain. This is because lenders have their own turn-times for conditions, updated documents etc. Furthermore, escrow may not be able to accommodate any last-minute change to your closing time without pushing your closing date further out.
2. Please do not plan any vacation or travel out of town until you have closed your home financing.
3. Here are some other tips while refinancing or buying a house.

Factors to consider when locking or floating rates.

1. Market conditions

• Lock: If rates are trending upward or are expected to rise due to factors like inflation, economic growth, or Federal Reserve actions.
• Float: If rates are stable or declining, and there’s a reasonable expectation of a decrease.

2. Personal Timeline

• Lock: If you are close to closing and need certainty in your monthly payments.
• Float: If you have flexibility and are in the early stages of the homebuying process.

3. Risk Tolerance

• Lock: If you prefer security and predictability in your budget.
• Float: If you’re comfortable with the possibility of rates fluctuating, potentially securing a lower rate.

When to Lock or Float?

• Lock if:

  • Rates are volatile.
  • You’re within 30-60 days of closing.
  • You need to stick to a specific monthly budget.

• Float if:

  • You believe rates will drop.
  • You’re not under contract yet or have flexibility.

A low, steady rate environment is good news for borrowers because it removes the pressure of racing the rate clock.  Whether to have a short vs. long lock time really depends on your risk for tolerance. The downside of getting shorter rate locks is that rates can shoot up without warning and stay aloft for weeks or months which translates into a more expensive loan.  What is most likely to undermine your rate lock is the length of time it takes to get to closing. Waiting until you have better visibility on how long it will take to get to close is a necessary prerequisite to locking your rate.  In general, I recommend that rates to be locked once loan Conditional Approval has been received. We offer 30 Day Lock on a home purchase which is sufficient to take you to closing.  Mortgage rate locks allows you to closing date in the Locked Current Interest Rate for a specific period of time ranging from 15 to 90 days with 30 and 60 days being a standard. 

We do not charge any fee to lock-in your rate but once locked – any rate lock extension comes with a price. Lenders charge for longer rate locks because their risk increases over time. If rates rise, then the lender will miss out on the difference. The benefit of a rate lock is that you are protected from rising interest rates during the lock period. The downside is that you  will not get the advantage of falling rates during that period.  Once you have locked your rate and rates improved afterwards - you may qualify for rate-lock negotiations but it comes at price.  If the benefits out weight the costs - then you should proceed with rate-lock negotiations. Rate locks are important because interest rates affect the cost of your loan. If the rate rises, you could end up getting priced out because the loan then becomes expensive than what you are qualified to borrow. Rates move in an eight of an increment or 0.125%. A half a percentage point increase could mean an extra $100 per month in mortgage payment (depending on the loan amount) or worst yet – you may no longer qualify for a loan because your debt to income (DTI) ratio is too high.  

There are some instances where you might need to extend your rate-lock. The appraisal might come in too low so you will have to appeal it and extend the rate lock or the appraisal process takes longer than expected.  Be sure to communicate with your loan originator constantly throughout the process – if you are getting close to the end of your lock and the house closing is still far off, talk to your lender about options for extending your lock. Finally get everything in writing. It’s important to have documentation of the terms of your rate lock so there are no surprises when it’s time to close. Check your current market rates here and consider this information to formulate your plan.