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 can gamble a bit more. You are not required to do anything-- you can afford to see what the mortgage market might do. But realistically, if the interest rate you are looking at today looks good, go ahead and lock. Holding out for an 1/8th - 1/4% lower interest rate may only equal another $20 or $30 a month less on your payment isn't worth the risk of rates going higher! If you want to gamble... play 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!
We all know it’s easy to be fooled by low “teaser” rates that are advertised on TV and online. What you see lenders typically advertise is a one size fits all rate with some tiny disclaimer words you can hardly read or with TV and radio ads, they say it so fast you can't make it out.
The truth is-- that rate is the best they have for a perfect borrower and property scenario-- and even if truthful its unlikely to apply to you. With that in mind, here is a list of unique factors that will affect the interest rate you would receive.
As you can see - it would be impossible for a quick rate quote --or generic online ad to factor in these variables to provide you with accurate info. It takes a loan officer gathering the info below to precisely dial in a rate you would receive.
Home price and loan amount: Your home price minus your down payment will determine how much you’ll borrow which helps determine how much the interest rate
will be.
Down payment: Generally, a higher percentage down payment equals a lower interest rate.
Loan term: Shorter terms (like a 15-year or a 20-year) typically have lower interest rates than a 30-year term.
Interest rate type: Interest rates come in two basic types: fixed and adjustable. Fixed rates do not change over time. Adjustable rates, on the other hand, have an initial fixed period then go up or down based on the market. For example, a 5-year ARM loan will have a fixed-rate for the first 5 years and then the rate will fluctuate from the 6th year onward.
Loan type: Different categories of loans --conventional and government backed loans-- VA, FHA and USDA --have different rates. Conventional loans usually have higher rates than government backed loans, however government backed loans have upfront fees -- and with FHA & USDA --monthly mortgage insurance or loan guarantee fees that make their lower rates less desirable.
Purchase, Refinance or cash out?
With all other factors being equal a purchase loan typically has a better rate followed closely by a no cash out refi --with cash out refinances having higher rates.
Credit score: Based on credit report information and calculated credit scores sourced from the 3 main credit bureaus--Transunion, Equifax, and Experian. Typically, this is called your FICO score and is based on numerous factors which includes your credit history and available credit.
Property type & usage Primary residence gets the best rate followed by a second/vacation home and then higher still is a rental property. Condos and manufactured homes typically have higher rates
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