Should you lock or float your mortgage rate today?

The decision each borrower needs to make before closing. (iStock)

If you’re in the market for a new mortgage (either buying your first home or investigating mortgage refinance options), you’re likely checking mortgage rates on a weekly basis.

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Currently, a 30-year fixed mortgage is at 2.93 percent (as of Sept. 3, 2020) -- 0.56% lower than interest rates a year ago in September 2019. It is hard to imagine interest rates getting any lower, but many analysts are predicting a further decline.

From an interest rate perspective, this is a very exciting time. Those interested in seeing how rate fluctuations impact their own financial decisions should visit Credible to compare lenders and mortgage rates.

Not only can interest rates changes impact how much you’ll spend and save, but staying on top of mortgage rates also affects another important mortgage-related decision: whether to lock in a low rate or to float it in hopes of further interest rate reductions.

What is a mortgage rate lock?

“Locking” in your mortgage rate means the rate quoted by a potential lender is the interest rate you’ll receive at closing. Between house hunting, rates shopping, and closing, a real estate transaction is often a months-long process. Locking in the rate protects borrowers in the event rates during these events.

As a start, potential borrowers should use an online mortgage calculator to determine monthly payments and see the difference in savings even a small dip in interest rates can make. And when vetting mortgage brokers, borrowers should use a tool like Credible to get personalized rates and preapproval letters without any impact on their credit score.

HOW TO FIND THE BEST MORTGAGE RATES RIGHT NOW

Most lenders provide a rate lock letter with the preapproval that lasts anywhere from 30 to 90 days. Lenders can extend a rate lock, or provide a lengthier one at the start, but these options cost money for borrowers, so be sure to run through all the considerations of your personal situation before making a decision.

For example, a homeowner sees an interest rate from a lender for a $400,000 mortgage at 3.25% but doesn’t lock in the rate. Thirty days later, he’s ready to buy a home, but interest rates went up to 3.45%. At the higher interest rate, the borrower pays $40 more per month and close to $16,000 over the life of a standard 30-year fixed-rate loan.

When should I lock my mortgage rate?

“Locking” in the rate is good during fluctuating interest rate environments because it provides peace of mind, keeps your interest rate low, and protects against any rate increases. This means borrowers can shop for a home (or a refinance) and be certain their borrowing power won’t change when the market does.

Also, since interest rates are currently at historical lows, it’s hard to imagine a scenario where rates could go even lower than they are now. If you’re already shopping for homes and certain you’ll be making a move in the next 30 to 60 days, locking in the rate is a good idea to ensure the one you’ve qualified for stays put.

If you're looking to secure a low rate today, then visit Credible to see what mortgage lenders are currently offering and what kind of rates you'd qualify for with your current financial situation.

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What is floating a mortgage rate?

Instead of locking in a rate, “floating” a rate means you are banking on interest rates falling even further between rate shopping and closing on the home.

Floating your mortgage rate is different from the concept of a “float down” rate. A “float down” option is actually the best of both worlds: you can lock in the current rate, but if the market changes and rates drop even further, the lender will provide you with an even lower rate.

Borrowers can vet lenders with different loan rate lock features on Credible.

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When should I float my mortgage rate?

We’re living in an unprecedented time for interest rates as they are historically low and keep falling despite industry predictions and hopes for economic recovery. Even though we’re in a falling interest rate environment, consumers can’t truly know or “time” the market. It is still riskier to float a mortgage rate rather than lock it in, even if it means missing out on savings.

If rates keep falling each week, it may be worth it to continue to float the rate instead of locking it in and make the decision closer to your closing date. You can also consider floating your mortgage rate if you are flexible on your move-in date or aren’t 100 percent on if you’ll be buying or refinancing your home.

As a final word of caution against floating a rate: interest rate changes aren't the only factor that can change the rate you qualify for from a lender. Any changes to your credit score can impact this rate, too. If you are unsure of what your credit will do in the short-term future, rate locking makes more sense.

No matter the mortgage rate option you choose, borrowers must lock in a rate prior to closing. This helps underwriters run the numbers on the loan and then accurately prepare documents for closing.

How to get the best mortgage rate

Whether you lock your mortgage rate or decide to float is up to your level of risk tolerance and your home buying/refinance timeline.

And while the lock versus float decision is an important one, there are other ways to get the best interest rates possible, and these steps can provide bigger interest rate drops than watching subtle week-to-week interest rate changes.

Potential home buyers (or refinancers) should go back to the basics when it comes to getting the best interest rates: always rate shop between lenders, work to increase your credit score and stack a large reserve for a sizeable down payment.

Based on the current mortgage and refinance rates, it's still likely a good time for you to refinance. To see how much you could save on monthly payments today, crunch the numbers and compare rates using Credible's free online tool.

GET THE BEST MORTGAGE RATES BY FOLLOWING THESE 5 STEPS