‘Locked’ vs. ‘Floating’ Mortgage Interest Rates

March 18, 2020 12:00 am

Coins, small house, calculator and notepad with pen on the tableWhen applying for a mortgage, borrowers are given the option to “lock” or “float” their interest rate. As your mortgage planner, I will use my knowledge of rate trends and the current housing market to best advise my customers on what the right choice is for their current situation.

“Locking” a mortgage interest rate means that the borrower has a rate that won’t move from the time that the lender offers it to them to the time that the property closes. If mortgage rates increase, consumers won’t be affected, and their locked rate will stay the same. However, if mortgage rates decrease, the consumer is still tied to the higher rate that they locked. Most mortgage lenders offer rate locks for 30, 45, or 60 days. Requirements for rate locks are that the loan must close within the predetermined timeframe and there can be no changes to the loan application.

A “floating” mortgage rate is a rate that is subject to daily market fluctuations. If the interest rate rises or lowers by the time that the borrower closes on the loan, they can either gain or lose buying power accordingly. This benefits the borrower when rates decrease. However, if rates are increasing daily, it is not advantageous. In general, if the borrower is comfortable with the payment that they would receive at current rates, it is best to lock in that rate. Knowing that the rate and payment won’t increase is less stress on the borrower.

If mortgage rates are showing a trend of decreasing week after week, it is often advantageous for the borrower to “float” rather than “lock” their rate until they are closer to the closing date. However, in a market where rates are trending higher and higher, borrowers would likely see more benefit from a mortgage rate “lock” as long as they have a set timeline from contract to close on the loan.