To say mortgage rates are volatile right now is an understatement. Every few days for the past two months, there have been heavy swings in mortgage pricing, translating to strong gyration in mortgage rates. Nothing can be more frustrating for a pre-approved potential homebuyer than knowing their ability to qualify and their subsequent proposed payment could change in an instant. But there are other options that can help take the volatility out of your house hunting.
Should You Lock In a Mortgage Rate?: Most lenders will not lock in your interest rate until you have a ratified purchase contract or a bona fide legitimate purchase agreement. Mortgage lenders offer interest rate locks for 30 days, 45 days, 60 days and some even as long as 90 days, with the majority of buyers doing 30-day rate locks to match the traditional 30 days for close of escrow. Locking in an interest rate means you've committed to an interest rate that will be used for the term of the loan, e.g. 360 months for a 30-year fixed-rate mortgage.
• Payment clarity upfront.
• More time to budget and plan your finances during the escrow process.
• More time for the lender to get your loan package through the underwriting process.
• More allowance to focus on other aspects of your purchase offer, i.e. contractual obligations.
• Missed opportunity for a reduction in the interest rate, which means a lower monthly payment.
Should You Float?: Floating your rate is defined as simply not locking in your interest rate. Floating essentially allows your interest rate and payment to move on a daily basis until you fully commit to your lender on an interest rate.
• The opportunity for a lower interest rates and costs.
• Depending on your individual lender's policies/procedures, the opportunity to switch loan programs during the loan process, such as going from a 30-year fixed-rate mortgage to a 15-year fixed-rate mortgage.
• This can be a risky position to be in during a volatile interest rate environment.
• You risk rates rising while you float, which could reduce your ability to qualify for a mortgage and could impact your earnest money deposit on your purchase transaction.
Which Is Right for You?: It depends on your personal threshold for how much risk you're willing to take on by floating for interest rate opportunity. If you can qualify for the mortgage loan even if rates were to rise during your loan process, you would have the luxury of being able to take advantage of a favorable market reaction the next time the bond market rallies. On the flipside, you'd be entering into a purchase contract with thousands of dollars on the line in exchange for what may or may not come to fruition with rates. This is why it solely depends on your appetite for risk and how much you're willing to gamble in the market. If you have a 30-day close of escrow, that's not much time for floating in an attempt to seize something better.
Other Timing Considerations: Don't forget interest rates aren't the only consideration to take during the home-buying process. Some other factors include:
• Ordering an appraisal, or making sure value comes in at purchase price.
• Releasing any inspection contingencies.
• Providing updated financial documentation in a timely manner to the lender. (This is a big one!)
• Releasing any loan contingencies.
While these steps in the purchase process seem relatively small, they can very quickly become task-heavy, which otherwise can change your focus from interest rates to making sure everything else is in order. Granted, your loan officer and real estate agent will be handling a lot of these steps in conjunction with you, but these are things to be mindful of in addition to trying to time the market.
Strategy for Locking In a Mortgage Rate: In a perfect situation, locking ahead of major economic news is generally the most conservative approach. It is expected that before large economic market mover information comes out, an idea of how the market will react is typically released 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 gives you and your lender an opportunity to examine the market and discuss whether not it makes sense to float or lock the interest rate prior to the official announcement. Keep in mind that the speculation beforehand is just that -- speculation -- and you will need to make your own call based on the information.
When talking to associates and the public about real estate topics, it’s important to be educated on the issues that we value most as REALTORS®. Government fiscal and tax policy can be confusing issues that many REALTORS® don’t feel they have time for. Still, anyone working in the industry is bound to strike up a conversation that leads to the current budget shortfall and potential ways to fix it. Reducing or eliminating the Mortgage Interest Deduction is often suggested.
REALTOR® advocates need to know a few quick facts to show our clients and our communities why this deduction is so important to homeowners, families, and the country as a whole. This infographic makes the major points that every REALTOR® should be able to recount, without getting mired in the muck of too much tax policy:
The statistics make it plainly clear how valuable the Mortgage Interest Deduction is to Americans. Roughly three out of every four homeowners with a mortgage claims the deduction.
With an average tax deduction of $2,713, the MID is a major savings for home buyers who are investing in their futures. Without that deduction, we’d see some significant increases in taxes for middle-class Americans.
The typical taxpayer who claims the MID is under 45 years old, married, and has children. Their household income is under $200,000. This is the quintessential working family that is in the process of building a nest egg for their children’s future and long-term for retirement. Saving those tax dollars each year is encouraging them to make investments in their community.
One of the biggest concerns with proposals to change the MID would be the effect on home prices. Values of real estate across the country would be projected to fall 15 percent if the MID were eliminated altogether. After finally beginning to recover from the previous downturn, real estate markets would be devastated by another such a drastic drop in prices.
Real estate is one of the biggest components of the national GDP, comprising about 15 percent of the total. Consumer spending creates jobs and economic growth, and real estate has always been a leading driver for consumer spending. Our national economic well being is, and always has been, tied to a healthy real estate market.
As REALTORS®, we’re obligated to speak up when real estate issues are on the table. We know better than anyone the importance that the real estate market plays in every American’s financial well-being, whether or not they own a home. Political arguments may espouse some lofty theories, but the real-world facts support our position.
by Sam Debord