Today’s housing market is full of steady increases. Home prices and mortgage rates continue to rise year over year. In fact as of late July 2018, the average 30-year fixed-rate mortgage was 4.54%. That’s quite a bit higher than the same period the year before, which averaged around 3.92%.
Knowing this information, home buyers might be concerned about receiving an affordable interest rate on their mortgage. Queue, the ability to lock or float your mortgage rate!
What does it mean to lock a mortgage rate?
Locking a mortgage rate means that your rate won’t budge from the time a lender offers it to you until you close on a home loan. This means that should mortgage rates rise (which they always do), you won’t be affected. Lenders typically offer locks for 30, 45, and 60 days, although this isn’t set in stone. The longer the term, the more you’ll pay for it. While this sounds good in theory, there are a few downsides to locking a mortgage rate. For starters, you won’t have the option to make any changes to your mortgage application once you lock within the time frame. In another instance, you won’t be able to take advantage of lower rates if they drop.
What can affect a locked mortgage rate?
There are some instances where your locked mortgage rate can be affected (or in other words, your interest rate could change).
- You decide to change the type of mortgage or your down payment amount.
- Your home appraisal is higher or lower than expected.
- You applied for new credit or missed a payment on your existing one. This affects your credit score which in turn, affects your mortgage.
- Your lender made a mistake in documenting any of your additional income.
What does it mean to float a mortgage rate?
A floating mortgage rate is just as it sounds; the rate is subject to daily changes in the market. For example if the interest rate increases by the time you decide to close on your mortgage, you’ll lose buying power. On the flip side, if the rate falls, you’ll earn power. In general, it’s more risky to float than it is to lock. Because no one can 100% predict the future mortgage rates.
So how do I know which option is right for me?
If mortgage rates are steadily decreasing week after week, it might be a good option to float your mortgage until you get closer to your closing date. That way you’ll have a better chance of receiving a good rate when it comes time for the loan transaction.
However given the circumstances of today’s market and looking at past trends, a locked mortgage is a more solidified plan.