Locking vs. Floating Your Mortgage Rate: What Experts Say Could Save You Thousands

It's always a gamble when trying to secure the lowest possible mortgage rate. For homeowners looking to refinance, this could mean the difference between paying a few hundreds dollars more or less each month, on top of your principal.

"In a volatile market, the best timing for a refinance comes down to your personal financial readiness, not trying to predict rate movements," Bob Driscoll, senior vice president and director of residential lending at Rockland Trust, tells Realtor.com®.

Mortgage interest rates can change several times a day and the rate you secure is based on a variety of factors, like your credit score or loan amount.

Currently, the average rate on a 30-year fixed mortgage is 6.22% for the week ending Nov. 6, according to Freddie Mac. That rate climbed from the prior week, when it registered at 6.17%.

But if you're you're refinancing, you'll be faced with a decision: Lock in a rate or float a rate.

"Timing the market for best rates on a new home purchase can be nearly impossible, especially when confined within a 30- to 60-day closing cycle," Brian Shahwan, vice president, mortgage banker, and broker at William Raveis Mortgage, tells Realtor.com. "However, timing the market for a refinance can be a little easier."

Shahwan explains that the first thing homeowners should do is notify their lender that they’re interested in refinancing.

"This not only allows you to fine-tune the numbers to understand where the current market is and any costs involved, but also allows a loan officer to prepare your file to launch as soon as there is a favorable rate drop," explains Shahwan.

For homeowners not in a rush to refinance, starting the process and letting a loan officer know the magic number you're hoping to secure will help.

But this is where the decision of locking in a rate versus a floating rate comes in.

What is a lock-in interest rate?

When you lock in your rate, you "save" that rate and that price for whatever lock period you have chosen.

"Usually, loan officers lock in to save the rate and price for a 30-day commitment," Michelle Parkison, senior vice president with AD Mortgage, tells Realtor.com. "If no loan parameters change within those 30 days, and you are able to get your loan underwritten and closed during that time frame, that interest rate and price stay the same no matter what the market is doing on the day you close your loan."

But locking in a rate also comes with a “rate lock period.”

"Best rates typically come with a 15- or 30-day rate lock, meaning you would need to close before the rate lock expires, otherwise you may be subject to rate lock extension or relock fees," Shahwan explains. "Some banks also offer 45-day, 60-day, 90-day, and even 120-day locks. Generally, the higher the lock period, the higher the rate."

What is a floating interest rate?

A floating interest rate means you get the lowest interest rate at the time of closing, but it may be different from what was quoted during the pre-approval process.

"Floating the rate means you are processing the loan without initially locking the rate. Essentially, the rate is unlocked and you are subject to market fluctuations," says Shahwan.

He explains that there are risks to a floating interest rate. Shahwan advises that in a downward trajectory market, it may be a good strategy to float the rate as long as possible to lock in at the lowest rate before closing. In an upward-trending rate cycle, borrowers may want to lock in quickly so the rate doesn’t go higher.

"The downside of floating the loan while in the mortgage process is that you are 'playing the market' and hoping that rates will go down while your loan is getting reviewed by the lender," says Parkison. "The upside of floating your loan during the underwriting process is that you can get a slightly better price if your lock commitment period is shorter."

Lenders offer float-down options for homeowners who have locked in their rate and then the market significantly improved during the time period that the loan was locked before the loan closes.

"It is a win-win for both the homeowner and the lender to allow the rate to 'float down' to current market pricing at a fee. The loan stays with the lender who has put time and expense into underwriting that file, and the homeowner gets a lower rate at an equivalent price," says Parkison.

Refinance checklist

When deciding to refinance in this up-and-down market, there are several key things to keep in mind.

• Start by determining your home equity by checking your latest mortgage statement for your outstanding balance, and subtract that figure from your home's current value. 

• A homeowner should make sure that the amount of savings per month by lowering the rate is not erased by the closing costs of the refinancing transaction.

• It's important to understand the current rate environment and what it means in terms of reducing your overall monthly payments. 

• Borrowers who received financial assistance for down payment or closing costs may have obligations to keep the current loan open for a certain period of time, or else they’ll need to pay back the funds.

• Investors with a prepayment penalty on the loan may want to wait until the penalty is up before beginning the refinance process.

"Review your broader financial picture, and make sure refinancing aligns with your goals and long-term plans," advises Driscoll. "If you expect to stay in your home for at least several more years, refinancing likely makes sense. But if you plan to move soon, you may not have enough time to recoup the associated costs."

"It is never too early to speak with a mortgage professional to understand your options," Shahwan adds. "Mortgages aren’t a one-size-fits-all solution. So there are tons of reasons why a refinance may make sense now versus later."

"If the math works, and you can save money today by lowering your rate, don't be afraid to go through the process," Parkison says. "And don't worry about 'playing the market.' You can always refinance again, when rates lower even more."