Mortgage Answers

Over the past few months, I have had the same recurring questions from borrowers in regards to what is meant by :locking or 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.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.

Another reason may simply be that in today’s market, the loan program in which you are applying for may be changing underwriting guidelines or being discontinued all together, so you must lock in that rate prior to the change date.

What does it mean to lock a rate? 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 If the loan process goes beyond the time period locked, then, the lock is canceled and the interest rate offered is no longer valid, or the lock can be extended for an additional fee.

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 copy of their lock so there are no misunderstandings . Many loan officers do not 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,  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.

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This entry was posted on Sunday, April 20th, 2008 at 3:23 pm and is filed under Interest Rates, Loan Process, Mortgage Loan. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.