Combining ‘hope’ with ‘tolerance’

Question: Mortgage interest rates seem to be wildly fluctuating right now. How can I know when the best time is to lock my rate, and not lose out if rates go down after I lock the rate?

Answer: You didn’t indicate in your question whether you are purchasing a home or refinancing, so my answer is “It depends.” Before we discuss strategy, however, let’s clarify that your rate is in one of two positions: You either have a “locked” rate, or you are “floating with the market.” If you are locked, you and the lender have committed to an interest rate, points and lock period.

If you are floating, your rate and points are subject to the whims of the market, can either increase or decrease without notice, and may create additional transactional stress for you.

If you are purchasing a home and have signed a contract, you have a contractual time frame in which you need to perform (i.e., complete the purchase and close on the transaction).

Locking your mortgage interest rate immediately gives you the comfort of knowing what your monthly payment will be. However, hope arises in all of us that we may “get a better rate if we wait.” Unfortunately, using simply the “hope strategy” turns even the most conservative of us into gamblers. The gamble is whether or not rates go up while “hoping.” You will be, most likely, committed to completing the purchase transaction at market rates.

You can, however, choose to float your rate with the market, combining the “hope strategy” with a definition of your “tolerance level” of payment. Work with your lender to define the highest rate for your comfort level, and if rates reach that level, LOCK — no matter what. While floating, however, if rates drop, continually move your tolerance level downward with the rate market, and again, if rates begin to climb, you LOCK the rate at the newly defined tolerance level.

Rates are time-sensitive, meaning that most lenders can lock a rate for a 15-day, 30-day, 45-day or 60-day time period. The longer the lock period, the more costly the rate is to you. If you lock within 15 days of closing, for instance, your rate can be 1/8 percent less than a
30-day lock, or your origination fee can be perhaps .25 percent less. Rates also change daily — sometimes more frequently. Talk to your lender about how lock periods affect your rate. In any case, you will need to lock your rate within about 3-5 days of closing.

If you are refinancing, you can receive a fully underwritten loan commitment from the lender, and just wait for your hoped-for interest rate to become available. However, most lenders no longer give a loan commitment without an appraisal accompanying the loan application. So, you will need to pay for the appraisal up-front, understanding that both the underwritten approval and the appraisal have expiration dates. If you choose not to immediately lock your rate at loan application, the “hope and tolerance” strategy, as described above, is your option.

One more thought: Many lenders will allow you to float your rate down (even if you have already locked the rate) if rates significantly improve. So, make sure you understand your lender’s policies on rate float-downs after lock.

For The New Mexican

The Mortgage Muse can be contacted at themuse@anasazimortgage.net.

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Neil D. Lyon CRB, CRS, GRI Cell: 505.660.8600 Direct: 505.954.5505

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