FINANCIAL WELLNESS

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Jul 2017

What’s the Difference Between Locking and Floating Your Rate?

As you go through the mortgage process, you’ll make several decisions. Who will be your lender? What will you request be fixed after the inspection? Who will be your home insurer? The list goes on and on. One of the most delicate decisions you’ll make is whether to float or lock your rate. It’s a popular question all mortgage bankers receive from their borrowers — understandably so. Your interest rate helps determine what you’ll pay for the next 10 to 30 years. So let’s jump into what your options are and help you decide.

What is your rate lock?

First things first, what exactly is a rate lock, and why should you consider it? Your interest rate is one of the most important components of your mortgage process, as it impacts what your monthly payment and lifetime loan amount will be. Therefore, the day you “lock” your rate is very important.

Keep in mind, a rate quote is not a rate lock. Just because you’ve received a quote doesn’t mean you’ve locked.

Locking your rate means you’re entering an agreement with your lender that your interest rate will be reserved for a particular amount of time. Even if the market rate is higher on the day you close, your interest rate will be the same as the day you locked it, assuming you close before the rate lock period expires. Why does that matter? Interest rates change frequently, often daily or even multiple times a day. A small change in your rate could mean significant changes in the interest paid over the life your loan. With all that said, locking your rate protects you against the risk of rising market rates during the weeks before your closing.

What does it mean to float your rate?

On the other hand, you also have the option to float your rate. Some borrowers choose not to lock their rate because they hope the contrary may happen — the rate could go down. By choosing to “float” your rate, you’re deciding that you don’t like the current interest rate and want to wait for it to (hopefully) improve. You may also have a long closing planned, and you’re out of the lock period ranges. Most lenders offer 30-day locks, while some offer 45 days or more. Let’s suggest you have an anticipated 60 day closing, you may choose to float your rate to avoid a potential extended lock period fee. Either way, your interest rate has the potential to fluctuate unless it’s locked. Whether deliberate or not, you’re assuming more risk by floating your rate.

What's your risk tolerance?

One of the best ways to determine if you should float or lock is to consider how much risk you’re willing to accept.

The simple truth is — you never know what direction rates will go.

How rates are determined is a very complex topic that can confuse even the most knowledgeable mortgage experts. But generally speaking, there’s a balancing act between the economy and rates. If you’re good at keeping an eye on market trends and you predict a rate decrease, you might be more comfortable with floating. If you think rates are likely to stay the same or increase, you might be better off locking. But again, no one ever really knows for certain what the rates will do, so you must be willing to accept the risk if you choose to float. If uncertainty keeps you up at night, locking is definitely the better option.

Consider a float-down or discount points

Many borrowers worry that they’ll miss an opportunity if they lock too soon. What happens if the rate drops after you’ve locked? You have a couple options to consider. Some lenders may allow a “float down” option where you could take advantage of a lower rate. These options can be expensive, so you’ll definitely want to weigh the immediate cost versus the long-time savings. Before you lock, ask your lender what your options are in the event of a significant market drop.

Discount points are something else to consider. When you lock your rate, you’re also locking the discount points associated with that rate. A discount point allows you to purchase a lower rate by paying a percentage of the loan amount. The cost and percentage decrease vary depending on the market the day you locked, as well as by lender.

You could choose to purchase discount points later in your mortgage process. Just be sure to give your lender notice so they have time to update your loan structure and paperwork. Also, just like with the float down option, be sure to consider the cost versus savings.

Floating or locking your rate is a big decision, but your mortgage banker should work closely with you to help find the best solution. While there’s no easy solution, consider the level of risk you’re willing to accept.

Frequently Asked Questions

Chances are, if you're wondering about it, someone else has too. Here are answers to some of the questions we hear most often.

What does it mean to lock my mortgage rate?
Locking your mortgage rate means you and your lender agree to hold a specific interest rate for a set period of time, typically until your loan closes. Once locked, your rate generally will not change even if market rates move higher before closing, as long as you close within the lock period. Your mortgage banker can walk you through your lock options based on your anticipated closing timeline.
What does it mean to float my mortgage rate?
Floating your rate means you choose not to lock, leaving your interest rate open to change based on daily market movement. Borrowers who float are typically hoping rates will drop before they close. While a lower rate is possible, rates could also move higher, so floating carries more risk than locking. This is generally a better option for borrowers who are comfortable with uncertainty and are closely monitoring the market.
How long does a mortgage rate lock last?
Rate lock periods typically range from 30 to 60 days, though some lenders may offer longer lock windows. The right lock period depends on how far out your closing date is. If your closing is more than 60 days away, you may want to discuss your options with your mortgage banker, since extended lock periods can sometimes come with additional fees.
What happens if rates drop after I lock my rate?
If rates fall after you lock, you generally stay at your locked rate unless your lender offers a float-down option. A float-down option may allow you to take advantage of a lower rate if rates drop significantly after you lock. These options are not available from all lenders and may come at an additional cost. Ask your mortgage banker upfront whether a float-down option is available and what conditions would need to be met to use it.
Is there a fee for locking my mortgage rate?
In many cases, standard rate lock periods are included at no additional cost. However, extended lock periods or rate lock extensions may come with fees, depending on your lender and loan program. If your closing is delayed and your lock expires, you may need to extend your lock, which could affect your rate or cost. Your mortgage banker can explain what applies to your specific loan situation.
Should I lock or float my rate if I'm buying a home in Virginia, North Carolina, Florida, or Georgia?
The decision to lock or float depends on your risk tolerance, your closing timeline, and current market conditions, not the state where you are buying. That said, local market conditions and closing timelines can vary. Borrowers in markets like Virginia Beach, Charlotte, Raleigh, or Atlanta may have different closing timelines depending on the pace of the market. Your Atlantic Bay mortgage banker can help you weigh your options based on your specific situation.
What is the difference between a rate lock and a rate quote?
A rate quote is an estimate of what your interest rate could be based on current market conditions and your loan details. It is not a commitment. A rate lock is a formal agreement with your lender to hold that rate for a specific period. Just because you have received a quote does not mean your rate is locked. Always confirm with your mortgage banker when your rate has been officially locked.
Can I change my mind after locking my rate?
Once your rate is locked, it is generally binding for the agreed-upon period. If rates drop and your lender offers a float-down option, you may be able to adjust, though conditions and costs vary. If you want to switch lenders after locking, you would typically need to restart the process with the new lender, which may affect your closing timeline. Talk with your mortgage banker before making any changes after locking.

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The views and statements expressed are deemed reliable as of the publish date indicated and may not be accurate or reliable at any future date. The views and statements provided are those of the author. Discussions regarding any financial information provided are not intended as individual recommendations and do not reflect the views or advice of Atlantic Bay Mortgage Group, L.L.C. The views expressed are subject to change at any time in response to changing circumstances in the market. *For refinances, the total finance charges may be higher over the life of the loan. Atlantic Bay Mortgage Group, L.L.C. disclaims any obligation to publicly update or revise any views expressed or information given. Loan programs may change at any time with or without notice. Information deemed reliable but not guaranteed. All loans subject to income verification, credit approval and property appraisal. Not a commitment to lend. Atlantic Bay Mortgage Group, L.L.C. NMLS #72043 (nmlsconsumeraccess.org) is an Equal Housing Lender. Located at 600 Lynnhaven Parkway Suite 100 Virginia Beach, VA 23452.