When closing on a home loan or refinancing your existing mortgage, one of the questions your loan officer is going to ask you is if you want to lock or float your mortgage rate. If you've never purchased a home before, this question may confuse you. As a refresher, your mortgage rate is the interest rate you'll pay on the home. The lower the rate, the less you'll pay in interest overall and the less your monthly payment will be. Whether to float or lock your rate will depend on the current market rates, the expected market rates, and your individual circumstances.
What Does it Mean to "Lock" a Mortgage Rate?
Once your lender approves your mortgage loan, he or she will ask you if you want to lock in your mortgage rate. Most lenders will lock a rate for free for 30, 45 or 60 days. "Locking" a rate essentially means that the lender will honor the rate they quoted you for 30 to 60 days, protecting you from any rate increases. Since rates change on a daily basis, some people prefer to lock it in immediately so they don't risk getting a worse rate.
Make sure to ask your specific lender if they charge you for locking a rate. Some lenders will charge a percentage of the loan in order to lock in the rate for a longer period of time. Ask questions regarding this until you fully understand how your lender works.
What Does it Mean to "Float" a Mortgage Rate?
When your lender approves your mortgage, you are not obligated to lock in the rate they quoted you. Instead, you can choose to "float" your mortgage rate until it hits a number you're comfortable with or until the loan closes. When you float your rate, you risk the rate increasing and paying more money in interest. However, if rates are headed down, you might end up with an even better interest rate on your loan than had you locked in the rate right away.
If you decide to float your rate, you can call your lender at any time and have him or her lock your rate whenever you choose, prior to the loan closing.
Should You Lock or Float Your Rate?
If rates are at historical lows, such as they are now, it might give you peace of mind to lock in your rate. You know you're getting a good rate today, so why risk getting a worse one when the loan closes? On the other hand, if you suspect rates will go down, you might want to float your rate to see if you can get an even better deal on your loan. No one knows for sure whether rates will go up or down, but there are many economic factors that do play a role. You can read our daily rate lock recommendations here at LendingTree to help you make your decision.
If rates fall a certain amount between the time you lock in your rate and when you close on your home, your lender may honor the new rate even though you locked. Wells Fargo, for example, will honor the new mortgage rate if it falls .25 percentage points or more. When comparison shopping lenders, make sure to ask them what their policies are on floating or locking a mortgage rate. Do your own research, talk to people who have been in your situation before, and make an informed decision on whether or not to lock or float your mortgage rate.