Lock Your Rate and Relax!
Mortgage interest rates -- just like stock prices -- change daily and they are currently at 30 year lows. For the homebuyer that is "shopping" for a mortgage or waiting for rates to fall even lower, I suggest that you make a decision and do it quickly because the sooner you lock your rate, the less chance you have of losing in the Mortgage Rate Game. This logic is sound whether rates are rising or falling. Locking your interest rate is a very safe play for you because no matter what direction rates move between today and your closing date, you'll usually end up on the winning side of the table.
Scenario #1: If you are locked and rates increase between today and your closing, you win because your mortgage rate is below the market mortgage rate on the date of closing.
Scenario #2: If you are locked and rates stay flat between today and closing, you win because you did not spend time watching Bloomberg, CNBC, or doing other research trying to determine what rates will do. Time is a valuable commodity, so why waste it.
Scenario #3: If you are locked and rates drop between today and your closing, you win because most mortgage lenders will allow you to lower your interest rate if the market drops 1/4% or more prior to your closing date. This service (called a float down) is typically gratis because lenders would rather lower your rate to keep your business than to watch you jump to a different lender at the 11th hour.
All three scenarios are winners. Now, the opposite of "locking a rate" is "floating a rate". Floating is exactly what it sounds like -- coasting along on the waters, rising and falling with the tide of market activity. In the Floating Game, there is only a 33% success rate.
Scenario #1: If you are floating and rates increase between today and your closing, you lose because the mortgage interest rates on the date of your closing will be higher than today's market rate, costing you extra money with a higher mortgage payment each month.
Scenario #2: If you are floating and rates stay flat between today and your closing, you lose because you spent time watching Bloomberg, CNBC, or doing other research trying to determine what rates will do. Time is a valuable commodity, so why waste it.
Scenario #3: If you are floating and rates drop between today and your closing, you win because the mortgage interest rates on the date of your closing will be lower than today's market rate, saving you extra money with a lower mortgage payment each month.
Floating your mortgage rate only has a 33% success rate! 33% gets you into the Baseball Hall of Fame, but it's a pretty high failure rate when you're talking about a mortgage. For example, consider the impact of a 1/8% change in mortgage interest rates for a $350,000 loan, amortized over 30 years: $350,000 at 5.000% PI= $1,878.88 $350,000 at 5.125% PI= $1,905.70. A 1/8% is equal to $26.82 a month.
By locking your rate, you limit the downside to 1/8% since most lenders will give you some type of float down if rates move down by a large amount. However, you are not protected on the upside (if interest rates move up). With the current volatile market, it is not out of the question to see rates move 0.25% in a few hours and most of the volatility in rates is moving up since mortgage investors are very quick to raise rates and much slower to decrease rates. Thus, no matter where you are in the home purchase cycle - if you have a signed purchase contract in hand, lock your rate as soon as possible. There is no better way to protect yourself from the fickle mortgage markets. If you are locked and your deal falls apart, then so be it. Lenders won't blame you (or charge you any fees) if you and the seller can't reach an agreement on an inspection issue when you're both acting in good faith.
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Gary L. Solka, Mortgage Banker
Sente Mortgage
Gary.Solka@SenteMortgage.com
512-637-9900
www.SolkaTeam.com
