Author Topic: Mortgage Rate Lock Strategy  (Read 1295 times)

Axecleaver

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Mortgage Rate Lock Strategy
« on: January 26, 2016, 07:58:47 AM »
This thread is to discuss possible mortgage rate lock strategies. Mortgage rate locks are a form of market timing, or an insurance policy. The question is when it is worth buying the insurance that a rate lock provides.

This chart tool from bankrate is helpful to observe rate trends: http://www.bankrate.com/funnel/graph/

As of today, 1/26/16, due to market volatility, mortgage rates are falling from already low rates. This week's average rate for a 30 year fixed rate conforming loan is 3.71%. This represents the lowest rate since 5/2013. Rates in the last five years entered a long trough in July 2012 (3.6%) and bottomed out in November at 3.41%. They stayed below 3.6% until May, 2013, about ten months. A month later, in June 2013, the rates had shot up to 4.3%, where they stayed elevated until December 2014.

I expect rates to fall this week, but savings may not be passed on to borrowers, so they could remain unchanged around 3.7%. Next week if the situation remains the same, rates will fall as banks compete for a shrinking pool of borrowers. In an environment like this one, where rates are generally trending down, it does not seem smart to lock the rate. So in a stable or falling rate environment, don't lock. If rates are rising, a lock may make sense.

Questions to ask when determining strategy:
1. What is the current rate trend? Mortgage rates follow 10 year treasury notes.

2. What does the lock cost? Is there a floatdown provision?
Some banks offer a rate lock for free, but you don't get the floatdown advantages. They pocket the upside if rates move down. If the lock costs you points, it may not be worth it; have to weigh the costs of the higher rate over time vs. the flat fee at the start with all the opportunity costs that these calculations require. May be better to take the risk of a higher rate and invest the fee you would have paid in your investment portfolio instead.

3. What is the risk of the deal not closing? Locking before inspections complete seems unwise in general. Get closer to a closed deal before pulling the trigger.

Thoughts and opinions on strategy appreciated. PS, surprised that this topic has not been addressed here before.

sj16

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Re: Mortgage Rate Lock Strategy
« Reply #1 on: January 26, 2016, 02:09:31 PM »
just locked 30 yr fixed jumbo at 3.375% this morning...i'm quite happy with it.

green daisy

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Re: Mortgage Rate Lock Strategy
« Reply #2 on: January 26, 2016, 07:45:23 PM »
 
just locked 30 yr fixed jumbo at 3.375% this morning...i'm quite happy with it.
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That's great!  Which lender?  Are you paying any points?