Mortgage Rates: Know When to Lock

If you love gambling but can't afford to fly to Las Vegas, consider floating your mortgage rate.  Not locking in a rate is a definite gamble; it can yield big rewards or big losses.  Know the odds before you take the risk.

People who have a gambling problem share a common trait:  They believe that they'll win it back on the next roll of the dice.  This dangerously optimistic lot believes that prosperity is just around the corner.

If you have that gambler's mentality, approach your next mortgage loan with caution.  Homeowners have the option of either choosing a rate lock or a rate float.  It's important to understand the ramifications of both choices-especially how it will affect your mortgage rate-before you make a decision.

Mortgage rates: lock or float?

When you apply for a home mortgage, a loan officer will review mortgage rates with you.  She'll ask if you'd prefer a rate lock, or a float.  If you choose to lock, you'll receive the mortgage interest rate currently available.  It doesn't matter if mortgage rates increase or decrease between now and the time your loan closes; you'll receive the rate of that moment.

The polar opposite of a locking mortgage rate is a floating one.  In this case, your rate will "float" with the market.  You'd opt for this choice hoping that overall mortgage rates will decrease, thereby improving your monthly loan payment.  But choosing to float could be a nail-biting experience.  You have no guarantees.  Pundits will speculate on whether or not interest rates will decrease, but it's just like the stock market:  No one really knows for sure.

Play it safe:  Find your number

If you love to gamble, you can float your rate.  But for the majority of homeowners, gambling on their shelter isn't worth it. So how do you know when to lock in your rate?

For a home purchase, lock in your rate as soon as you're qualified for a loan.  You can always refinance the mortgage in the future.  For a mortgage refinance, opt for a different tact:  Target a number you're comfortable with, and don't lock in your mortgage until you hit it.  If you're close to your target, a locking mortgage rate will make you comfortable.  It's all a matter of risk tolerance.  Considering that many people purchase a new home loan every five years, this loan won't last forever, and it's not worth the stress.

It doesn't matter who you talk to-loan officers, mortgage bank presidents, the Chair of the Federal Reserve-no one can really say if mortgage rates will rise or fall.  To avoid the stress that accompanies floating your rate, pick a number you can live with and lock it in.  You'll sleep better at night, and you won't look back tomorrow.