Rate Locking and Floating Basics

In today’s interest rate environment the decision of when to lock and when to float is very important. It is also very difficult to monitor the market and make predictions on what will happen. The market is so volatile these days and playing the interest rate game is very risky! I wanted to talk briefly about interest rate locks and some of the different approaches one can take.

First the whole point of a lock is to secure a particular interest rate for a set time period. These range from 7 days and go up from there. The most common lock period is 30 or 45 days. You will receive a pricing hit that increases with the term of the lock. This is why you see some people continue to float to try and incur the smallest hit.

Floating is choosing not to lock in order to try and catch the market on a good day to lock. Most customers like this idea because it is music to their ears that they could possibly get a lower rate. What they don’t like is the possibility that they could get a higher rate if the market goes the other way!

Consumers want the best of both worlds. They want to take advantage of a drop in rates, but they want the security of a lock. This simply cannot be done.

As you begin your loan process there are two approaches you can take.
The first is to shop around and find a lender that you can trust that offers you a fair price. If you are happy with the rate and do not want to mess with it any further, just lock!

Second, after discussing your rate and the current rate environment you can decide to float. If you choose this option you better feel comfortable with who you are dealing with and make sure they know their stuff. Very few lenders have the knowledge or spend the time and money necessary to monitor the market in order to form their own market analysis. .Floating is never perfect and the market can change in the blink of an eye. Your loan officer can have the best intentions and still not get you locked. This is because unforeseen variables can be thrown at us from time to time. Case in point was Mid-December 2008. Rates hit all time lows on December 17th and all of the lenders websites began to crash while everyone tried to lock. The end result was that by the time the sites came back up, rates had already shot back up! Many people missed out! So you can see how difficult this is. Keep this in mind. Give your loan officer your target rate and they can tell you if it is realistic. It is also best to give them the green light to lock at a given rate you would be happy with if rates begin to shoot up. They may not have time to reach you via phone to discuss the situation. Remember the only sure thing is to lock, but this information should help you if you choose to float. A couple other important things to note are as follows.
If you lock with Investor A and rates drop considerably you are not out of options. Worst case scenario we can switch investors, but we are penalized for this. So the investors have put in a few policies to help. Each investor has their own renegotiation process. If the market has moved enough we can possibly renegotiate to that days going rate or close to it. Some lenders are offering more lenient rate extensions as well. Every situation is different, so be sure to ask. The whole point it to get you what you want as long as the current rate environment allows it. We are working for you. Just realize that there is no perfect science and if anyone tells you they are smarter than the market, they are wrong. There is always risk and you must be aware. Most people do not have a large enough loan balance that makes holding out for an extra .125% worth it. The monthly savings difference really isn't that much is most scenarios. However, rates shoot up much faster than they go down so the extra .50% you might end up paying if the market goes the wrong way fast will surely be noticed! Floating isn't always bad, just be aware of how the process works and the pros and cons so you can make your own decision.

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Flat Branch Mortgage