When shopping for a mortgage, what is the best time to float your rate and when should you lock it in? The answer to this question depends on two things:
- Your objective – if you are buying a home, would your chances to qualify for the loan be jeopardized if interest rates rose? If you are refinancing, will the current interest rate save you a significant sum of money?
- Your tolerance for risk – floating an interest rate can benefit a client in two ways. First, if rates were to fall, the client could lock a lower rate. Second, if a client chooses to wait until just before the closing date to lock the rate, often times the loan officer can give the client a small break on costs because the mortgage company doesn’t have to take on the risk of managing the lock. So, if you’re willing to risk the possibility of interest rates rising, it may pay off via a lower rate or lower costs. If you don’t like the idea of taking that risk – lock the rate.
What is a Rate Lock?
A rate lock is a pledge between lender and client that guarantees the loan at a specified interest rate. The lender and client have a window of time, usually 15, 45, or 60 days, to close the loan. At Quicken Loans, we aim to close your loan in 40 days. The shorter the lock period, the better things look from a financial point of view. Locking a rate means the lender now has taken on the risk – and the longer they have to take on the risk, the more expense they pass on to their clients.
However, don’t confuse a rate quote with a rate lock. Just because a lender gives you a rate quote doesn’t mean you’ve locked in at that rate. This is a common mistake many prospective borrowers make. Make sure you are crystal clear as to whether you’re locked or not and, if you are locked, what the rate and terms are. Get it in writing.
What Does It Mean to Float? Floating means you are willing to take the risk that interest rates will either not go up or that they will fall. If rates have been dropping, then you might want to take a chance that rates will be lower by the time you close your loan than they are today.
Here’s some practical wisdom from Bob Walters, chief economist at Quicken Loans, “Far too many people, who couldn’t have cared less about interest rates before, become obsessed with rates while they are in process with a mortgage company. The reality is that, while we’d all love to time the market perfectly, it’s extraordinarily difficult to do. If the loan, at the quoted rate, makes sense – lock it in. Leave the rate prognostication to the bond traders.”
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