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3 Reasons for Floating Your Interest Rate


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TERMINOLOGY

If you use a floating interest rate for your mortgage loan, when rates decrease, your decision was a wise one. However, if the rate rises, your payment rises right along with it. There are times when floating your interest rate can make sense, but you must decide carefully before you inform your lender of your decision.

1. You Expect Rates to Fall

This is the reason that most people decide to float the interest rate on their mortgage loan. If interest rates have been dropping, floating your rate makes sense, depending on how long you have to lock the rate in. Markets of any kind have a tendency to trend when the rate starts to move in one direction. This is not always the case, but it does often happen.

If the rate falls, you can either contact your lender and lock the rate, or let it float. If the rate begins to rise, you will have to decide whether to let it continue floating, or to lock it in at a higher rate.

It is important to be aware of the payment implications of letting your interest rate float. If rates increase to the point where your monthly payment is no longer affordable, you will not be able to borrow the amount you originally needed. Lenders have strict debt to income debt ratios so be sure you do not float yourself out of a loan.

2. You Want a Larger Loan

If you need a larger mortgage loan, but the rate is too high for you to afford the extra monthly payment, letting the rate float might be the right decision. This is applicable if you have already received an approval from your lender for a specific loan amount. In that approval, the lender tells you the maximum payment you qualify for under their guidelines.

By floating your interest rate, if the rate drops, your payment becomes less than the maximum amount your lender approved. This means you can increase your loan amount, until your loan payment is back to the maximum amount your lender approved.

Make sure you inform the lender of your reason for floating the interest rate. They need to be aware of the added sum you want to borrow, because the principal cannot exceed their loan-to-value guidelines or you will be unable to get the extra amount you wanted.

3. You Will Pay the Loan Off Early

If you only intend on having the loan for a short period of time, floating your interest rate can make sense. For example, you are selling some assets, and you have not yet received the proceeds from the sale. Once you receive the proceeds, you will pay the loan off early. If for some reason the sale of your assets falls through, you may want to consider locking in your rate right away, since the reason you had for floating the rate is no longer applicable.