Mortgage interest rates -- just like stock prices -- change price daily and lately they've been trending higher.
For the homebuyer that is "shopping" for a mortgage, or waiting for rates to fall, or just "hasn't gotten around to it", I implore you to make a decision one way or the other, and do it quickly.
The sooner you lock your rate, the less chance you have of losing in the Mortgage Rate game. The logic works whether rates are rising, or falling (and may Trackbacks keep my words alive for a very long time...)
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 end up on the winning side of the table.
If you lock your mortgage rate today, you are assured a 100% success rate.
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 to determine where rates are today. Time is a valuable commodity for most people, and wasting it can be costly.
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 prior to your closing date. This service 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.
So far, so good? 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 in mortgage interest 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 to determine where rates are today. Time is a valuable commodity for most people, and wasting it can be costly.
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 in mortgage interest 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 person's home.
For example, consider the impact of a 0.125% increase in mortgage interest rates against a $350,000 loan, amortized over 30 years:
$350,000 at 6.500% = $2,212.24
$350,000 at 6.625% = $2,241.09
The smallest of increases -- 0.125% -- adds $28.85 in interest payments monthly. Yes, there is an additional tax benefit in paying more interest, but the payments are higher nonetheless.
Multiply $28.85 by the 360 payments in a 30-year loan, and you see that floating your interest rate can add more than $10,000 in interest payments to the life of the loan. Even the 4-year (48 payment) cost is nothing to scoff at -- $1,384!
So -- 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, and you can always adjust your rate downward if the markets move down later.
If you are locked and your deal falls apart, well then so be it. Lenders can't blame you if you and the seller can't reach an agreement on an inspection issue when you're both acting in good faith.
Remember, you win 100% of the time if you lock your rate, but only 33% of the time if your float and gambling on a $350,000 asset just isn't worth it.
The information contained on The Mortgage Reports website is for informational purposes only and is not an advertisement for products offered by Full Beaker. The views and opinions expressed herein are those of the author and do not reflect the policy or position of Full Beaker, its officers, parent, or affiliates.
Ron Z. Real Estate Agent
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