Should you lock or float a mortgage rate?
Mortgage interest rates -- just like stock prices -- change price daily and you can win or lose a little if you don't know what you're doing. The decision to float or lock an interest rate should be based on timing-- like when's your closing date, what financial reports are due in between now and your closing date (like job reports, employment forecasts, Fed rate changes), --how likely are these reports likely to move the markets, and your risk tolerance.
A conversation with a professional Loan Officer who knows your personal situation is generally has the best advice.
For the home buyer with a signed a purchase agreement on a home, we almost always suggest you lock as soon as possible. The sooner you lock your rate, the less chance
you have of losing in the Mortgage Rate game.
If you are refinancing, you have the flexibility to take a bit more risk. There is no obligation for immediate action - you can wait to observe how the mortgage market behaves. However, in practical terms, if the current interest rate appears favorable, it is advisable to secure it. Holding out for a slightly lower interest rate of 1/8th - 1/4% may result in only a marginal decrease of $20 or $30 in your monthly payment, which may not justify the risk of rates increasing. If you are inclined to take risks, consider activities like playing slots, cards, or dice.
What is a Rate Lock Period?
The lender will usually quote rates along with a rate lock period, usually 15, 45, or 60 days. The loan must close within this period. The longer the rate period, the higher the interest rate.
What is a Rate Lock?
When you "LOCK" your interest rate with your lender, you and the lender agree this is the guaranteed rate you will receive, and that no matter what the markets do before closing, you will not be charged a higher rate if rates go up, and you will not be able to get a lower rate if rates go down. Your rate lock should be in writing.
Another common problem with getting a rate quote is you often get one from Lender A on Monday, Lender B on Tuesday, and Lender C on Wednesday. Rates can change daily, sometimes multiple times. Therefore unless you get all your quotes at the same time, you don't have accurate information and may end up going with the wrong company.
Many lenders purposely quote rates lower via their web sites to simply get you to stop shopping around. This is especially true for purchase loans, as you most likely will NOT be in position to actually lock that rate today.
What Does It Mean to Float?
Floating your rate means means that while your loan is in progress, the rate is NOT yet guaranteed. You are taking 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. Discuss the floating with your Loan Officer. Sometimes it is worth the gamble, sometimes it isn't.
I received a Rate Quote. Now what?
When buying a home or refinancing, it is common to call around to many lenders to get a rate quote. There are things you need to understand about that quote. A simple rate quote, or online automated rate via a web site is not a guaranteed rate. More often than not, it is not even accurate, but rather, it is designed to capture your attention.
The only rate quote that matters is the day you lock.
DID YOU KNOW? You can pick any interest rate or closing cost you want. Just understand selecting one always affects the other. Want lower closing costs? Your interest rate goes up. Want lower interest rate? Your closing costs go up!
Other low rate quote tricks for example is a well known national lender quotes rates that you can't even lock in until AFTER your loan has been fully underwritten, and you are just days from closing. The rates look great, but who cares if you can't lock it?
What factors affect my actual quote and why a generic rate quote is inaccurate
Don’t be fooled by big lender & online ads!
It is common for people to be deceived by the low “teaser” rates seen on TV and online. Lenders usually promote a standard rate that may not suit everyone, often accompanied by small disclaimers that are difficult to read or are spoken so quickly in TV and radio ads that they are hard to understand.
It's true that the rate offered is the most competitive for an ideal borrower and property situation, but realistically, it may not be applicable to your specific case. Keeping that in mind, here are some distinctive factors that will influence the interest rate you are eligible for.
It would be challenging for a fast rate quote or a generic online advertisement to consider these variables accurately and provide you with precise information. To determine the rate you would receive, a loan officer needs to gather the information listed below.
Relationship between home price and loan amount: The loan amount is determined by subtracting your down payment from the home price, which in turn influences the interest rate.
Down payment: In general, a higher down payment percentage results in a lower interest rate.
Loan term: Shorter loan terms, such as 15 or 20 years, generally come with lower interest rates compared to a 30-year term.
Type of Interest Rate: There are two main types of interest rates: fixed and adjustable. Fixed rates remain constant over time, whereas adjustable rates start with a fixed period and then adjust based on market conditions. For instance, a 5-year ARM loan will maintain a fixed rate for the initial 5 years before transitioning to a variable rate from the 6th year onwards.
Types of loans: There are various loan categories available, including conventional and government-backed loans such as VA, FHA, and USDA. Conventional loans typically come with higher interest rates compared to government-backed loans. However, government-backed loans may have upfront fees and, in the case of FHA and USDA, monthly mortgage insurance or loan guarantee fees, which can offset the benefit of their lower interest rates.
Purchase, Refinance or cash out?
Assuming all other factors are the same, a purchase loan generally offers a more favorable rate, with a no cash out refinance coming in a close second, while cash out refinances tend to have higher rates.
Credit score: Your credit score is determined by information in your credit report and calculated credit scores obtained from the three major credit bureaus—Transunion, Equifax, and Experian. This score, often referred to as your FICO score, is influenced by various factors, including your credit history and available credit.
Property type & usage The best interest rates are offered for primary residences, followed by second/vacation homes, and then rental properties. Condos and manufactured homes generally have higher interest rates.