Is it Wise to Float?

To "Float" means to defer the decision to lock the interest rate and points until a later date. The prevailing market conditions will then determine the terms of the lock-in at that time. The option to lock-in or float the interest rate and points is entirely your choice. What Options Are Available for Setting the Mortgage Terms? Lenders may offer different options in establishing the interest rate and points that you will be charged, such as: Locked-In Interest Rate--Locked-In Points. Under this option, the lender lets you lock in both the interest rate and points quoted to you. This option may be considered to be a true lock-in because your mortgage terms should not increase above the interest rate and points that you've agreed upon even if market conditions change.

Locked-In Interest Rate--Floating Points. Under this option, the lender lets you lock in the interest rate, while permitting or requiring the points to rise and fall (float) with changes in market conditions. If market interest rates drop during the lock-in period, the points may also fall. If they rise, the points may increase. Even if you float your points, your lender may allow you to lock-in the points at some time before settlement at whatever level is then current. (For instance, say you've locked in a 10 percent interest rate, but not the 3 points that went with that rate. A month later, the market interest rate remains the same, but the points the lender charges for that rate have dropped to 2. With your lender's agreement, you could then lock in the lower 2 points.)

If you float your points and market interest rates increase by the time of settlement, the lender may charge a greater number of points for a loan at the rate you've locked in. In this case, the benefit you might have had by locking in your rate may be lost because you'll have to pay more in up-front costs. Floating Interest Rate--Floating Points. Under this option, the lender lets you lock in the interest rate and the points at some time after application but before settlement. If you think that rates will remain level or even go down, you may want to wait on locking in a particular rate and points. If rates go up, you should expect to be charged the higher rate. It is impossible to know with certainty whether it will be better to lock in or float the interest rate. However, you can improve the odds of making a correct decision. This section describes how.