0 votes
We are planning to purchase new home which will be completed in 11 months now, will be taking out a jumbo loan
Should we lock rate for a year or lock it 60 days prior to closing
asked Jan 21, 2018 in Buying a Home by anonymous

2 Answers

0 votes
The decision to lock or float a mortgage rate depends on more than whether you believe rates will rise or fall during your escrow. For locks exceeding 30 or 45 days, there are often charges that must be paid upfront for the privilege of locking. A 90-120 day lock might cost .75 to 1 percent, upfront. And a year? That's likely to be more.

So it really depends on what you're willing to spend, and what your lender wants to charge.  And keep in mind the fact that while your construction is supposed to be completed in 11 months, it is not uncommon for it to go longer -- meaning you could blow your lock after paying all that money.

This Mortgage Reports article shows how previous loan rate data would have affected the decision to lock for six months or not. In that case, most who locked for 6 months lost money. Here's a quote:

"Between 2000 and 2015, looking at rolling six-month changes, there was a period during which 30-year mortgage rates spiked 96 basis points (0.96%) within six months; and a period during which they plunged 139 basis points (1.39%).

As a home buyer, you'd be nervous when mortgage rates rose but ecstatic to see mortgage rates drop. However, these shifts are at the extremes.

Rates rose more than 75 basis points (0.75%) only 3 times; and they dropped more than 125 basis points (1.25%) only 3 times, also. During every other 6-month period, rates hardly moved much at all.

Since 2000, during any given 6-month period, 30-year mortgage rates moved just 14 basis points (0.14%) on average, affecting monthly mortgage payments by just $8 per month per $100,000 borrowed.

Furthermore, if we exclude months during which mortgage rates dropped -- only counting the months in which they rose -- the average 6-month change in rates was just 32 basis points (0.32%).

In other words, if you used an extended rate lock anytime between 2000-2015, you probably wasted your money. It would often have been better to wait until 60 days from your closing, and to execute your rate lock at that point."

While rates are in a different pattern now, I don't recommend long-term locks for new construction. One option, should rates increase, is being willing to switch from a 30-year fixed loan, which typically is not priced well at the jumbo level, to a 7/1 or 5/1 mortgage, which usually carries a substantially lower rate.

That's my take. But you are the one who has to live with your decision, and if floating your loan will cost you a year's sleep, go ahead, pay for the lock, and relax.
answered Jan 25, 2018 by GinaPogol (47,650 points)
0 votes
You cannot lock a loan for longer than 60 days. You are going to have to wait more towards the completion of your home.
answered Feb 6, 2018 by GustanCho (106,540 points)

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