Should I Lock in a Rate, Or Let it Float
Mortgage rates have changed dramatically over the past three months. And nothing can be more frustrating for a homebuyer who’s been pre-approved for a mortgage than knowing their ability to qualify for that dream home could disappear in an instant. But there are options available that can help you sleep soundly at night.
Should You Lock In a Mortgage Rate?
Most lenders will not lock-in your interest rate until you have a fully signed Purchase and Sale Agreement and have applied for a mortgage. Mortgage lenders offer interest rate locks for as little as 12 days. However, mortgage rate locks are typically for 30 days, 45 days, and 60 days. When you lock in your rate, you are no longer subject to the swings in mortgage interest rates.
The majority of home buyers will lock in a rate for 30 or 45 days at the time of application to give the lender sufficient time to process your mortgage application and get you to settlement.
Should You Float the Mortgage Rate?
When you ‘float your rate,’ all you’re doing is gambling that mortgage rates will fall so you may be able to take advantage of a lower rate if the rates go down. You are essentially in a risky position - especially when interest rates are volatile - and probably won’t be sleeping very soundly at night.
Which Is Right for You?
Whether you want to lock in a rate or let it float will depend on your appetite for risk.
If your debt-to-income ratios are low and if you can qualify for the mortgage loan even if rates were to rise during the time it takes to process your mortgage application, then you can afford to take advantage of a favorable market conditions - if it happens at all - that may lead to a drop in mortgage rates.
On the flip-side, you'd be entering into a purchase contract on a home with thousands of dollars on the line. This is why locking in a rate or letting it float depends on your appetite for risk and how much you're willing to gamble in the market. If you have to make settlement in less than 30 days on that home you just bought, you will soon realize that there’s not much time for letting the rate float in the hopes of getting a slightly better mortgage rate.
Strategy for Locking In a Mortgage Rate
In a perfect situation, locking a mortgage rate in ahead of major economic news is generally the most conservative approach to take. In general, before large economic market mover information is released to the public, you can get an idea of how the market will react beforehand.
For example, whenever the Federal Reserve makes a statement about the financial markets, usually there is information and analysis leading up to the speech before the news actually hits the markets. This will give both you and your lender an opportunity to examine the market and decide whether or not it makes sense to float or lock-in your interest rate prior to the official announcement. Keep in mind that any decision made before the news is actually released will be based purely on speculation, and you will need to make your own call based on the information.
Economic Reports to Watch:
The jobs report on the first Friday of the month sets the tone for mortgage rates that month with many lenders. An improving labor market will spell higher mortgage rates while a rise in the unemployment rate may help lower mortgage rates.
Anytime the Fed Chairman (the Federal Reserve) makes a statement, especially lately due to the Fed's position on the tapering of buying mortgage-backed securities.
When you get into contract to purchase a home, if you can justify locking in a mortgage rate upfront, take advantage of it. Interest rate volatility is not something you want to gamble with.
Mortgage Tip: While you’re in the early stages of buying a home, read the Mortgage Rate Lock Advisory on a daily basis to help give you a feel for what’s going on in the market that affects mortgage interest rates. That way you’ll be well informed once you decide it’s time to lock in your rate. Also, most lenders would be happy to refinance your mortgage if mortgage rates do drop. Typically, most lenders will require you to wait 6 - 12 months before you can refinance your purchase loan.
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East Bridgewater, MA 02333
Lew Corcoran, ASP®, IAHSP, IAHSP-CB