When to lock?

We believe that most people should lock their rate as soon as possible. Although there are special situations when "floating" (being unlocked) makes sense, it is a risky bet-- generally with more downside than upside.

Reasons to Lock

  1. If rates rise significantly, your rate and payments will increase. Interest rates can move significantly within hours based on news headlines (such as unemployment statistics). Floating can be very expensive.
  2. If rates fall slighty, you probably will not benefit from the savings. Your lender is likely to say that they had anticipated the slight rate drop and already priced that into your loan. Often, they are telling the truth; they may have priced your loan aggressively to win your business. If they are lying, it's very hard for you to prove it.
  3. If rates fall significantly, you can probably get your lender to reduce your rate even if you have locked. When rates drop significantly during your closing period (say, 3/8th or more), your loan is overpriced and your lender knows it. If you ask politely, they should make at least a partial adjustment. If they don't, it's fair to threaten to "walk". The threat is often credible, since if you still have time to start over with another lender, you will get a lower rate from them.
  4. Also, locking your rate forces your lender/broker to commit. If the rate you have been quoted is a lie, attempting to lock is one of the best ways to "smoke it out".

Reasons to Float

There are situations when it makes sense to float. Consider floating if:

  1. You are quite certain rates will drop more than expected and you trust your lender/broker/rep to pass along the savings. The expectations point is critical here: if the market expects rates to drop, that drop is already reflected in mortgage rates. You only benefit if rates drop more than expected.
  2. Your lender/broker/rep commits to lower your rate if rates stay flat. Some loan providers will do this since lenders pass along savings for loans that float. These savings are slight, but if interest rates appear very stable, the risk might be worth it.
  3. You can afford to lose the bet and make higher payments if rates rise.

Summary

We believe most people should lock their loan as soon as possible; there is usually more downside than upside to floating.

Float only when you can handle the risks, have a clear understanding with your loan provider, and are convinced rates will not move up.