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When you’re in the process of getting a mortgage, when should you float your rate and when should you lock it?

Perhaps it sounds like I’m speaking a foreign language, so before we get into which is right for you, let’s go back to basics.

What Does It Mean to Float?

Floating means you’re willing to take the risk that interest rates will go up in the hope that they’ll actually drop further. If rates have been dropping, then you might want to take a chance and hope that rates will be lower by the time you close your loan than they are today.

Let’s say the rate available on the market right now is 4.25%. If you float your rate, it changes with the market movements. It’s not unheard of for a piece of economic data to move the markets enough to change the rates by a quarter-point or more within a day or even hours. Your rate could go down to 4.00%, but it could also go up to 4.50% – and no one can time the market perfectly. So it comes down to your risk tolerance.

If you don’t want to gamble, you can lock your rate.

What Is a Rate Lock?

A rate lock is a pledge between a lender and a 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. The shorter the lock period, the better things look from a financial point of view. Locking a rate means the lender has now taken on the risk. If rates go up during the time your rate is locked, you’re protected against that market movement. So the longer they have to take on the risk, the more expensive it gets for the borrower.

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 that rate. This is a common mistake many prospective borrowers make. Make sure you’re crystal clear about whether you’re locked or not and, if you are locked, what the rate and terms are. Get it in writing so that everyone’s on the same page.

Here’s some practical wisdom from Bob Walters, president and chief operating officer of 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,” Walters said. “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.”

If you’re in the market for a mortgage and you like where rates are at, go ahead and lock your rate today. If you’d prefer to get started over the phone, give us a call at (888) 980-6716. If you have any questions, you can leave us a note in the comments.

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This Post Has 3 Comments

  1. We are taking out a jumbo loan, about 3 million dollars. Our loan will close in about 15 days. The rate went up last week from 3.5 to 4% . Now it’s at 3.85%. An 1/8 o f a point can cost us $350 more a month. The fact that it went down today, seems to show a downward trend. My husband wants to lock it now, but w e will save a lot of money if it goes down another 1/8 %. What do the “experts” predict?

    1. Hi Adele! You could take the risk of waiting for it to go down. However, there is a chance that rates could go up. If that were to happen then you would be losing out on the low rate you have now. There are no guarantees for how rates will move from day to day. I highly recommend reading a recent post about this very dilemma by Quicken Loans VP of Marketing Strategy and Business Channel Strategy Graham Skidmore, here.

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