Q. What does it mean to float a rate?

A.  Mortgage rates changes daily and in especially volatile markets they can change during the day.  Floating or floating the rate is when you have put in a mortgage loan application for a home loan but the mortgage rate is not locked or set at a specific rate but rather floats and may vary with the daily market interest rate changes.  While your mortgage rate floats, the interest rate on your home loan may go up and it may go down until the loan rate is locked.  The mortgage rate must be locked prior to the closing date but it can float either by request of the loan applicant or because the applicant is ignorant about how mortgage loans and mortgage rates function.  Of course, the mortgage payment will change as the mortgage rate changes. 

The opposite dynamic of floating the rate is to lock the mortgage loan rate.  When this happens the interest rate is fixed for that loan request for a predetermined period of time.  The home loan should be settled or close during the time period covered by the loan lock or the loan lock is of no value.  The loan lock can be performed at the time of the home loan application or anytime up to a few days prior to the home loan closing.

A mortgage applicant may float their loan because they believe mortgage rates are headed lower.  This can be risky business, but many mortgage applicants have guessed wisely and made the assumption that mortgage rates will drop between the time they place the mortgage application and the time the loan closes and in fact the mortgage rates do fall and that new mortgage loan borrower has a lower rate. 

Unfortunately, some mortgage lenders do not inform their customers about mortgage rate locks and the potential home loan borrower’s mortgage rate is floating because of this intentional lack of disclosure.  When mortgage rates suddenly rise, that borrower is now going to find that their mortgage rate is higher or perhaps more loan fees how been added to the closing costs to cover the costs of obtaining the original quoted rate that is no longer available in the mortgage market.

When a potential mortgage applicant is shopping and comparing mortgage rates it is important to discuss the rate lock with the mortgage lender.  Be sure to discuss how long the mortgage rate is good for.  Mortgage loan locks and rate floating applies to both purchase transactions and refinances.  

When you discuss the interest rate on a mortgage loan with a loan officer of a mortgage lender or bank, part of the discussion that is often left out is how long that mortgage rate is good for.  Many mortgage loan officers quote mortgage rates that are short term rates.  The rate difference between a long term commitment and a short term commitment may not be very much but there is a discernible difference. 

Mortgage rates generally have commitment time periods of 15 days, 30 days, 45 days, 60 days and sometimes longer.  If a mortgage applicant is applying for a home loan that is due to close in 40 days, a mortgage rate commitment for 15 days is essentially worthless.  Loan officers sometimes quote that 15 day commitment rate because it is cheaper either with a lower mortgage rate or lower fees and this draws the customer in.  Remember, the loan officer is a salesman first.  Later the loan officer tells the applicant they are not locked, hopefully at the time the home loan application is filled out but often they do not tell them until the loan is ready to close.  If rates fall the borrower may get a benefit and if they rise they are in for an unpleasant surprise.