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Should you Lock or Float your Interest Rate? Consider these Factors

Shawn Von Talge



03-18-2015

Float or Lock Interest RateWhen you apply for a home loan there is a critical decision you’ll have to make in regards to the interest rate: how long to wait before “locking” it in. Until you lock in your interest rate, you are doing what’s called “floating” it in the hopes that rates will go down and you can thereby get locked in at a lower rate than is currently available. In this article we will focus on what “floating” your interest rate means and what risks are involved with doing so.

When you choose to float your interest rate this means that your mortgage rate is moving with the market. As such, if you decide to float your interest rate and the rates in the market happen to improve, clearly this puts you in a position to take advantage of it. However, if the opposite scenario were to unfold (i.e., you decide to float your interest rate and the rates in the market worsen), you may end up being forced to lock your loan in at a higher interest rate than what you were quoted at an earlier date.

Keep in mind that this decision is not something to be taken lightly. There are a lot of factors to consider when deciding whether to lock or float your rate. Some of the more important of these include the following:

▸ The current economic climate
▸ The volatility index
▸ The economic releases for the week
▸ The Federal Open Market Committee (FOMC) agenda
▸ The amount of time between the beginning of the loan process and your closing date

All of these factors as well as a plethora of others could potentially influence your decision and the advice given to you by your mortgage professional. Another thing that should factor into your decision is your risk tolerance and how this tolerance could affect your approval. In other words, if you have been preapproved at ‘X’ interest rate and an increase to this rate has the potentially to adversely affect this approval and/or your buying power, it may be in your best interests to lock in at the rate you know you are approved at (as opposed to floating your rate and jeopardize your approval status/buying power if rates were to go up).

Ultimately the decision of whether to lock your rate in early on or float it on the gamble that rates will go down is your call. After all, it’s your mortgage and you will be the one making the payments on it every month. As always we recommend consulting with your mortgage professional on this decision but in the end you will always have the final say in the matter.

Thanks for reading!

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