What It Means to Lock or Float Your Mortgage Rate

How to Maintain Your Buying Power Before Closing

Smiling couple sitting at a table with paperwork, closing on house
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The current mortgage interest rate is a pivotal factor when you're determining whether to lock or float your rate when you're buying a home. It's a difference between effectively freezing it until closing or gambling that the rate will be lower at the time you close. Interest rates aren't stagnant.

Key Takeaways

  • Locking your mortgage rate ensures that your loan's interest rate won't move while you close the deal on a home.
  • Your locked rate can be affected by some factors, including changes to your credit profile or an unexpected home appraisal result.
  • Floating your mortgage rate leaves you susceptible to market conditions, and your interest rate could rise or fall by the time you close the deal on a home.

Mortgage Rate History

The average 30-year fixed-rate mortgage was 2.81% as of Oct. 29, 2020, significantly lower than it was at the same time in 2019, when it was 3.78%. The Federal Reserve voted not to increase the federal funds rate in March 2021 so it remains low, and this rate indirectly affects mortgage rates.

The chart below shows the change in 30-year fixed-rate mortgages from 2000 through Oct. 29, 2020.

The rate can change, hiking or plummeting, at any time. This is where deciding between locking and floating a mortgage rate comes into play.

What's a Mortgage Rate Lock? 

"Locking" a mortgage interest rate means that you'll have a rate that won't budge from the time your lender offers it to you until you close on your home loan. It's something of a guarantee. You won't be affected by the increase if mortgage rates rise after you've already locked in your rate.

There are some stipulations to a mortgage rate lock, however: 

  • You have to close on your mortgage within a predetermined period of time. 
  • There can't be any changes to your mortgage application. 

Mortgage lenders typically offer rate locks for 30, 45, or 60 days, although it's possible that a rate lock with a longer term could be available. Check with your lender about their rate lock options. 

Fees for rate locks vary by lender, but you'll have to pay more for a longer rate lock term. It can also be costly if you find that you need to extend your rate lock past the original term, and you won't be able to take advantage of a lower rate in most cases if you lock in your mortgage rate and rates then drop.

Some lenders will offer you an opportunity to receive a lower interest rate than the one you originally locked. This feature is called a "float-down" option. You'll be able to reduce your mortgage rate if market conditions cause interest rates to drop during your rate lock term.

What Affects a Mortgage Rate Lock?

A variety of factors can affect a mortgage rate lock, making your interest rate change. According to the Consumer Financial Protection Bureau, these include: 

  • You're changing the type of mortgage you're getting or your down payment amount. 
  • Your home appraisal came in higher or lower than expected. 
  • You applied for new credit or missed a payment on your existing debt, causing your credit score to change. 
  • Your lender had trouble documenting your additional income, such as a bonus, overtime, or other pay. 

What Does It Mean to Float a Mortgage Rate?

A "floating" mortgage rate is one that's subject to daily market fluctuations. You'll lose some buying power if the interest rate rises by the time you close on your mortgage. You'll earn some buying power if the rate falls.

Choosing to float your mortgage rate is more risky than locking it in because you really can't predict with any certainty what mortgage rates will do from day to day. 

When Does It Make Sense to Float or Lock? 

It might be more advantageous to float your mortgage rate when rates are showing a trend of decreasing from week to week, at least until you're closer to your closing date. There's a chance that you'll get a better rate when it's time for the loan transaction to take place. 

You might want to consider a mortgage rate lock in a housing market climate where interest rates are trending higher, provided that you have a concrete timeline from going under contract to your anticipated closing date. 

It's important to consider how an interest rate change would affect your monthly mortgage payment. For example, the monthly payment on a $200,000 home at a 4.5% rate would be $1,013, while the monthly payment at a 4.75% interest rate would be $1,043. That's a $30 difference that adds up to $360 over the course of a year. 

Discuss your rate lock options with your lender and the terms associated with any rate lock terms they might have available.