Earlier in my career, one of my mentors ran the trading desk at one of the country's largest mortgage companies. It was his job to anticipate loan closings and lock in rates for his loans by committing to sell those loans in the secondary market at a fixed price and yield. Once he made a commitment, the deal was done; there was no walking away.
Imagining the pressure he must be under, I once asked, "With interest rates constantly changing, how do you know when to sell the mortgages you have made commitments on? You could make or lose thousands of dollars with the slightest change in interest rate or price."
I will never forget his answer.
"If it is a good deal, you lock your price," he said. "Because if it's a good deal, it's a good deal regardless of what happens to interest rates tomorrow. You don't worry about rates or prices. The only way you get hurt is by being greedy and waiting too long for a better deal that never comes. You make your decision and you move on."
Today, consumers buying a home or refinancing their mortgage are—along with their loan officers—playing mortgage rate roulette. They are letting rates float on their mortgage application waiting to lock in what they hope will be a better rate. Lenders encourage this because it shifts the interest rate risk while the loan is in process from them to the borrower.
It is true that if rates are steady, the closer you get to closing and the shorter the rate lock period, the lower your interest rate will be. But waiting has significant risks.
If rates rise while you wait to lock in, your interest rate and the resulting mortgage payment can also go up. If the change in payment is significant, it can change your housing ratio (the percentage of your income needed to cover your mortgage payment). In a worst case scenario, it can result in a different underwriting decision and a denial of the application that you thought was approved.
Remember: if interest rates fall, you can always refinance. If rates go up, your interest rate will never be higher than it was at closing. When wondering whether you should lock or float, ask yourself, "Am I happy with the interest rate? If interest rates rise (and they will over the next 30 years) will this rate be a good deal?" If the answer to either question is yes, then lock in the rate and don't worry. If it's a good deal, it's a good deal.