As a Richmond VA mortgage lender, answering borrowers’ questions takes up a good portion of my day.  Sometimes a question stems from the use of a term with which my borrower was not familiar.  This happens with just about any profession–whether you’re a preschool teacher, auto mechanic, or physician, you’re bound to use workplace jargon your clients have never heard and do not understand.

Enter Word “Float”

Well, last night I was guilty.  I sent an email to a client recommending she float her interest rate.  Now, this particular client was very savvy.  She emailed back with what she assumed was the definition of float in the context of a mortgage, which was correct.  However, it was a reminder to me that the terms I’m used to using day in and out with realtors, loan processors, and underwriters, will be heard by the average Joe only a few times in his or her life.

The Definition

A floating interest rate is one that rises and falls with the the market.  The risk of rates rising is still in the hands of the borrower.  To “lock” an interest rate, therefore, means that risk has been transfered to the lender.  The borrowers are now protected against rising rates until their interest rate lock expires.

When to Float?

I typically advise clients to float an interest rate when a closing date is not set in stone, or, if they anticipate interest rates will be dropping before the close on a home purchase.  Here are a few examples:

• You’re purchasing a short sale and are awaiting bank approval.
• You’re purchasing new construction and won’t be closing for several months.

The Risk of Floating

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The risk you run when you float an interest rate is that rates may go up.  If you haven’t locked in your rate and transfered the risk to the lender, then it’s on you when rates go up.

The Risk of Locking

There is also risk involved in locking your interest rate, or setting it at a fixed number.  Rates could go down, and then you are stuck with the rate you have locked in.  Also, when you lock in an interest rate, it is for a fixed period of time: 15, 30, 45, 60, 90, or 120 days.  If you lock on a short sale or new construction and your closing is delayed until after your lock expires, there will end up being lock extension fees to keep your current interest rate.  These can get up into the thousands of dollars depending on how much additional time you need and your loan amount.

Extended Rate Locks

We do have programs that allow borrowers to lock for up to 360 days.  The rate pricing is higher and will cost you.  You will pay a certain number of points upfront.  Some of our programs allow you one or two “float downs” in the event that rate pricing gets better while you’re waiting to close on your home.

If you have questions about whether to float or lock your interest rate in Virginia please contact me for a mortgage consultation. 

This blog was originially published on January 7, 2014 my outside blog Loan Officer Lately.