Here’s a slick mortgage rate strategy for buying a house
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By Scott Sheldon  August 30, 2013 12:00 am

To say current mortgage rates are volatile is an understatement. For the last two months, there have been strong swings in mortgage pricing and mortgage rates toward the very unstable. Nothing can be more frustrating for pre-approved home shoppers than knowing their ability to qualify and their subsequent proposed payment could change at anytime. 

How does one deal with volatile rates when buying a house?

• Agreeing on an interest rate: Most lenders will not lock your interest rate until you have a ratified purchase contract. 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 thirty day contract.

 

To lock or to float?

Rate locking: This is committing on an interest rate, in other words “locking in a rate” you’re willing to take for the term of the loan, e.g. 360 months for a 30-year fixed rate loan.

The pros:

• Payment clarity upfront;

 

• More time to budget and plan your finances during the escrow process;

 

• More time for the lender to get your loan through the underwriting process;

 

• More allowance to focus on other aspects of your home purchase.

 

The only con is the missed opportunity for reduction in the interest rate.

 

Rate floating: This is defined as simply not locking 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 pros:

• The opportunity for a lower interest rate and better terms;

 

• Depending on your individual lender’s policies, the ability to switch loan programs during the loan process, such as going from a 15-year fixed rate mortgage to a 30-year fixed-rate mortgage, etc.

 

The cons:

• Risky position to be in during a volatile rate environment;

 

• Risk of losing earnest money deposit if you can’t qualify because of a higher payment.

 

To lock or float

the mortgage rate

In a nutshell, it depends on your personal threshold for how much risk you’re willing to take on by floating your loan 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 on the market. If you have a 30-day close of escrow, it’s not much time in an attempt to seize a better interest rate.

 

Following considerations 

come into the picture

• Ordering of appraisal, or rather making sure value comes in at purchase price.

 

• Doing inspections.

 

• Releasing inspection contingencies.

 

• Providing updated financial documentation in a timely manner to the lender  (biggest task in most cases).

 

• Releasing loan contingencies.

 

While these steps in the purchase process seem relatively small, they can very quickly become task heavy, which otherwise shifts your focus from the market ensuring all the ducks line up. Granted, your loan professional and real estate agent will take many of these steps in conjunction with you. Still, these are additional things to be mindful of in addition to timing 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 known that prior to large economic events that transpire, information is revealed that estimates the direction the financial markets will take when the news is actually released.

For example, whenever the Federal Reserve or anyone of the Fed presidents makes a statement about the financial markets, it usually causes mortgage rates to move radically. Information before the news hits is revealed to gauge the potential direction investors will take when the news actually is perceived.

 

Biggest market 

movers – month to date

• The jobs report on the first Friday of the month sets the tone for mortgage rates for the rest of the month.

 

• Anytime the Federal Reserve makes a statement, especially lately, because the Fed’s position on the tapering of buying mortgage-backed securities.

 

*Mortgage tip:  Most lenders would be happy to refinance you down the road anyway in the event rates did drop. Typically, most lenders have about a six-month waiting time to refinance the purchase loan you obtained six months earlier.

 

When you get into contract to purchase a home, if you can justify locking up front, do it. Interest rate volatility is not something you want to gamble with, as there are many other aspects to purchasing a home you might not realize. You can get pre-approved to purchase a home with a conservative rate strategy unique to your situation. 

 

Scott Sheldon is a local mortgage lender, with over six years of experience helping people purchase and refinance primary residences, second homes and investment properties. Visit him at www.sonomacountymortgages.com.

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