Lock-in or Float an Interest Rate
Choosing the correct option could cost you or save you money for the next 30 years.
What is a mortgage rate lock?
When you’re in the process of taking out a mortgage, you will be asked if you want to lock in or float your interest rate. This is also known as a mortgage rate lock. This is an agreement between the borrower and lender that locks the interest rate on a mortgage at the prevailing market rate for a fee.
A mortgage rate lock is valid for a specified period of time. Typically it is usually for 30, 45, or 60 days. This lock period usually takes place starting from the initial loan approval, through the underwriting process, and until closing. During this time, the loan’s interest rate will not change, unless there are changes to your application details.
What does it mean to lock-in an interest rate?
To lock-in an interest rate means that the lender guarantees the current market interest rate. They usually offer you to lock-in after your initial loan application has been approved but before the loan is submitted for underwriting. A mortgage lock protects you from the volatility of the market from that point until you close on your loan.
If Interest Rates Increase
If the market interest rates go up during your lock-in period, your rate is protected and will not increase.
If Interest Rates Decrease
If the market interest rates go down during your lock-in period, you won’t get the lower rate either, unless you have a “float down” option on your lock.
If Interest Rates Stay the Same
If the interest rate doesn’t budge, you’ve paid the fee but got the same result. A mortgage lock serves as a protection. Getting the same interest rate that you’ve agreed upon isn’t the worst thing that could’ve happened.
What does it mean to float an interest rate?
If you decide to gamble and float an interest rate, you are hoping that the interest rates will drop during this time. You are essentially telling the lender that you are not satisfied with the current rate, and wish to wait a bit longer.
Let’s say that you’ve just signed your purchase agreement. Right now the market interest rate is 4.25%. If you float your interest rate, it may drop to 4.00%, but it could possibly go up to 4.5% too. If you choose to lock-in, you are guaranteed 4.25% for the specified period of time. Ideally, you will close on your loan before the lock-in period is up. As a result, it is advisable not to lock in your rate too early to allow time for your loan to process.
What happens if my loan doesn’t close in time?
If the lock-in period expires before you close on your loan, the lender can extend your lock for free, charge an additional fee for the extension, or charge an additional percentage of the loan amount.