Mortgage Rates: Lock In or Float?


For would-be homeowners, choosing whether to lock in a mortgage rate with your lender or wait for rates to fall is a difficult decision. That's because even a seemingly small change in interest rates can add or subtract tens of thousands of dollars over the life of a typical 30-year mortgage.

The decision is even more difficult these days with such high volatility in mortgage rates over the past month. So if your mortgage lender is asking whether you want to "lock in" or "float," what should you do?

For starters, know what the two terms mean: Locking in means finalizing your mortgage rate and points on a fixed-rate or adjustable-rate mortgage (only the initial rate in the case of the latter). You'll have the same interest rate on your loan regardless of whether rates go up or down. The alternative to locking in is "floating," which means your rate will float up and down along with any daily changes in mortgage rates until you decide to lock in the rate.

In a market where mortgage rates are steadily rising, the advantages of locking in are obvious. By guaranteeing your rate early on, your new mortgage will be cheaper than if you had waited and rates had gone up. But in a market where rates are steadily falling, floating allows you to choose when you want to lock in rates thereby improving your chances of getting the lowest rate possible.

The more difficult choice comes when mortgage rates are more volatile, as they are now.

In last week's Primary Mortgage Market Survey, Freddie Mac (STOCK QUOTE: FRE) reported that rates for a 30-year fixed rate mortgage were up 52 basis points from the prior week to 6.46% with 0.6 points -- the biggest week-to-week rise since 1987. (A basis point is one hundredth of a percent.) This record rise comes on the heels of a record week-to-week decline of 42 basis points just last month.

The fact is, it's difficult to predict where rates are headed. Although the federal funds rate contributes to the direction of mortgage rates, the two are not in lockstep -- you can't expect mortgage rates to go down just because the Federal Reserve implements another rate cut. Instead, mortgage rates correlate very strongly with yields on 10-year U.S. Treasury notes. And predicting the direction of U.S. Treasuries is like predicting the direction of the stock market -- it's extremely difficult for experienced investors, much less first-time homebuyers.

So what should you do? Since you can't predict where rates will go, the answer largely depends on your financial situation. If you can't afford to buy if rates go any higher, consider locking in now. Even just a quarter-percentage-point rise in rates on a $200,000 mortgage loan translates to $33 more per month and close to $11,800 more in interest payments over the life of the loan. Check out the online mortgage calculator from to see how a rate change will affect your monthly payments.

If you are a risk-taker by nature and can still afford your home if rates rise even further, then floating is always an option. There's a chance that the thawing credit markets will bring rates down, and you always have the opportunity to win big. But floating also means you might lose big. Just remember that gambling on the short-term direction of mortgage rates is like speculating where the stock market is headed. In short, trying to time the market is rarely a winning investment strategy.

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