When shopping a mortgage on a new home, the buyer has a choice of locking in a fixed rate, or letting it float. Which is better? The answer is that it depends. The interest rate for mortgage loans fluctuates constantly, but just looking at the lowest mortgage rates does not necessarily give the lowest total cost of ownership.

With the interest constantly changing, it is difficult to know whether to lock in a rate or let it float. Traditionally, people sought a fixed rate as this gave them stability and knowing exactly what they would be paying for the life of the mortgage. But in recent years with fluctuating interest rates and new lows, borrowers with fixed rates could lose money.

A borrower needs to look at the pros and cons of each type of loan and make the best decision based on their situation, current rates and a best guess on where mortgage loans may be headed. If the rates are high, then a variable rate would be the best bet. On the other hand, when rates are at an all time low as they have been in recent times, a savvy borrower may want to lock in a rate. When the rates are fluctuating between the two extremes, a borrower needs to study the markets and do some math.

One factor that must be considered is any added cost to lock in the mortgage rate. Typically the lender will lock in the rate for a set amount of “points” or percentage of the loan amount, typically one percent. So when comparing the savings of a fixed rate, the borrower must estimate how long it would take them to save enough to cover the cost in locking the rate. If the borrower expects the rates to stay the same or rise, the fixed rate may still be attractive.

If the borrower expects the rates to fall, then the general tendency is to let it float to take advantage. But that isn’t the only reason to float a mortgage. The borrower may get a larger mortgage by letting the rate float. Also, if they are planning on paying the loan off early a float may be better. In this way they can take advantage of current low rates with less risk on the rates rising down the road if they pay the loan off early.

Regardless of whether the borrower chooses a fixed or floating interest rate for mortgage, it is important that they shop the lenders to make sure they are getting the lowest mortgage rates possible. A good lender can also advise them on the pros and cons of fixing the rate versus letting it float.