Over the past few months, I have had the same recurring question from borrowers in regards to what does locking a loan mean and floating a loan. Both principles are pretty straight forward and easy to explain.
LOCK A LOAN
When your loan officer suggests that you lock your loan, what he/she is actually telling you is to lock in the current interest rate you have been offered. There are many reasons why they may suggest this, but typically it is because there is a possibility that rate may change by the end of the day, or in fact in todays market, the loan program in which you are applying for may be changing guidelines and you might not qualify after the change date. Most borrowers do not realize that mortgage interest rates can adjust upward and downward on a daily and even sometimes an hourly basis. With current market conditions in the bond markets, interest rates can change very quickly. When a loan is locked what is created is an agreement between the lender and the borrower to guarantee the loan at a specified interest rate. Another item to consider is the length of the lock. Interest rate locks come in 15,30,45 and 60 day locks. What determines which time period to use depends on several factors, but mostly will the loan be able to close within that time period. If the loan process goes beyond the time period locked, then the lock is canceled and the interest rate offered is no longer valid. One thing to remember, a lock is not the same as a rate quote. When you call and ask what the rates are today and the loan officer quotes you a specific rate, that does not mean that rate is locked in. Your loan officer has to specifically lock in the rate. What I do with my customers when I lock in their rate is I will send them a copy of their lock so no misunderstandings can be had. Many loan officers do no do this, so request it when you decide the time is right to lock your loan rate.
FLOAT A LOAN
When you float a loan what you are actually doing is registering the loan with the lender. Basically what this is telling the lender is that you are serious about getting the loan, but you are willing to take the risk that by the time you close your loan, interest rates will not go up and are more likely to be lower. The one thing to be aware of is don't get caught up in the day to day changes in interest rates. Just like a stock trader, no one can call the bottom of a market. I have seen many borrowers take the risk of floating their loan and losing in the end because interest rates spiked up. Also, you should not float your rate trying to save 1/8 or 1/4 of a point. The risk is not worth what little savings you may end up with.
In todays volatile market place, depending on your situation, it might be best to lock in your interest rate. I have seen conforming rates jump 1/2 to 1 point higher in just a few short days and fall just the same. If you have further questions, you can call me at 707-494-8532 or 877-397-0674.
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