Author Topic: When should we lock in our mortgage loan rate?  (Read 637 times)

jeromedawg

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When should we lock in our mortgage loan rate?
« on: June 03, 2021, 07:23:10 PM »
Hey all,

Just entered escrow on a place and was wondering when is the best time to lock in the loan rate. We won't be able to float down but we can change rate % (but limited to/based on the day that the lock occurred). Escrow is slated to close in 30 days btw. It seems rates are based on the outlook (much like the stock market). That said, should we just lock in whatever offers the lowest rate with credit NOW? Or is it better to wait until we're closer/half-way to escrow closing?

Or is it better to pay for points?

Right now we could pay $1200 at 2.50% on a $420k loan The next level up at 2.625% they would give us a $1600 credit today.

We actually have the option, I think, to get as low as 2.375% but I think it would cost around $3k if I'm not mistaken.

Our friend who is a financial advisor/planner (we do not pay her for advice but she has given us her unbiased advice as a friend) told us we should strongly considering buying the points down as rates probably aren't going to go any lower (I'm assuming if they did and you refi'd then you'd basically have wasted paying those points). And our intention, at least as of now, is to stay in the home long term.
I did forget to bring up the point about taking the credit and investing it though - at 2.69% you get a $3500~ credit - if you took the $3500 and invested it with a 5% return over 30 years that's like $15k.

Aside from that, I'm still wondering if it's worth waiting to lock or if we should just go ahead and lock.
« Last Edit: June 03, 2021, 08:01:19 PM by jeromedawg »

ResolLaTot

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Re: When should we lock in our mortgage loan rate?
« Reply #1 on: June 03, 2021, 08:35:17 PM »
If those are 30 year rates, they are extremely favorable and I would lock immediately. As for which rate, the lower two look like they will take about 7 years to recoup the fees, while also accounting for credit associated with 2.625 rate. Judgement call. You have voiced a desire in other threads to keep your monthly low. So if 2.375 fees are really no more than 3k - go that route to save the $50+ bucks a month.  If paying the 3k rankles too much, go with the 2.625 and pocket the credit to help with  inevitable new house gotchas.

That's my gut take. You can't go wrong with any of those 3 rates. are u worried deal won't close in 30 and that is why you want to wait? Ask the lender what happens if you are not clear to close before lock expiration. They likely offer an extension for a nominal fee.

In short: Lock That Shit Up!!

secondcor521

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Re: When should we lock in our mortgage loan rate?
« Reply #2 on: June 03, 2021, 09:04:34 PM »
I'd personally lock as soon as both (a) I knew that the house will close before the lock expires, and (b) I could afford the payment on the mortgage.  For (a), this would mean that all the contingencies have been satisfied and removed by both sides.  For (b), this means that I'd be OK with whatever payment it'd end up being.

As far as points, I would divide the cost of the buy down by the difference in interest rate to determine a payback period.  If I knew I would stay in the home and keep this mortgage longer than that, then I would buy down.  Otherwise I wouldn't.  So for example, the difference in discount points for the first two options you list is $2800 ($1200 plus $1600).  The difference in rates is 0.125% times the $420K = $525 per year.  $2800 / $525 is about 5.3 years.  Will you stay in the house and keep this mortgage that long?

Your last point about taking the credit and investing it is an irrelevant point.  I can take $3,500 and invest it over 30 years, but that has nothing to do with your mortgage.  You can take $3,500 and invest it over 30 years too; with or without a mortgage and with or without points.  It's not $3,500 they're giving you anyway - it's just a lender credit which will show up as a line item on your closing statement and reduce the amount you need to bring to closing.  What I think you need to compare is the relative cost of various point levels (which is your investment) and the difference in payments (which is your return) and look at the breakeven for that (see previous paragraph).

P.S. - Yes, for you MBA types, there should be some sort of accounting for the time value of money, which makes the payback period a bit longer than 5.3 years.  But (a) this is all approximate anyway for making a decision now, and (b) the discount rate is pretty close to zero these days anyways.
« Last Edit: June 03, 2021, 09:06:13 PM by secondcor521 »

jeromedawg

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Re: When should we lock in our mortgage loan rate?
« Reply #3 on: June 03, 2021, 09:16:30 PM »
I'd personally lock as soon as both (a) I knew that the house will close before the lock expires, and (b) I could afford the payment on the mortgage.  For (a), this would mean that all the contingencies have been satisfied and removed by both sides.  For (b), this means that I'd be OK with whatever payment it'd end up being.

As far as points, I would divide the cost of the buy down by the difference in interest rate to determine a payback period.  If I knew I would stay in the home and keep this mortgage longer than that, then I would buy down.  Otherwise I wouldn't.  So for example, the difference in discount points for the first two options you list is $2800 ($1200 plus $1600).  The difference in rates is 0.125% times the $420K = $525 per year.  $2800 / $525 is about 5.3 years.  Will you stay in the house and keep this mortgage that long?

Regarding this point in the difference, we plan to live here longer than 5 years so which of those rates would I take in the case of your example? If I planned to stay no more than 5 years would I take the higher rate with higher credit? And if I plan to longer than 5 years (but maybe no more than 10) then take the lower rate with lower credit? And if I were to plan to stay as long as I possibly could (even to retirement) then commit to the lowest rate possible and pay down? I got the full rate schedule and 2.125% would cost $10,260.60 but this would in fact yield the least amount of interest paid over that 30 year period.

EDIT: I should mention for the lock there is no fee. Another thing is that if we were to do a 15 day lock, we could get a slight discount but I'm not really considering this as a factor to justify waiting longer than needed (it's a matter of a couple hundred bucks I think haha)

« Last Edit: June 03, 2021, 09:54:06 PM by jeromedawg »

secondcor521

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Re: When should we lock in our mortgage loan rate?
« Reply #4 on: June 03, 2021, 11:20:25 PM »
I'd personally lock as soon as both (a) I knew that the house will close before the lock expires, and (b) I could afford the payment on the mortgage.  For (a), this would mean that all the contingencies have been satisfied and removed by both sides.  For (b), this means that I'd be OK with whatever payment it'd end up being.

As far as points, I would divide the cost of the buy down by the difference in interest rate to determine a payback period.  If I knew I would stay in the home and keep this mortgage longer than that, then I would buy down.  Otherwise I wouldn't.  So for example, the difference in discount points for the first two options you list is $2800 ($1200 plus $1600).  The difference in rates is 0.125% times the $420K = $525 per year.  $2800 / $525 is about 5.3 years.  Will you stay in the house and keep this mortgage that long?

Regarding this point in the difference, we plan to live here longer than 5 years so which of those rates would I take in the case of your example? If I planned to stay no more than 5 years would I take the higher rate with higher credit? And if I plan to longer than 5 years (but maybe no more than 10) then take the lower rate with lower credit? And if I were to plan to stay as long as I possibly could (even to retirement) then commit to the lowest rate possible and pay down? I got the full rate schedule and 2.125% would cost $10,260.60 but this would in fact yield the least amount of interest paid over that 30 year period.

EDIT: I should mention for the lock there is no fee. Another thing is that if we were to do a 15 day lock, we could get a slight discount but I'm not really considering this as a factor to justify waiting longer than needed (it's a matter of a couple hundred bucks I think haha)

If you have the full rate schedule, the easiest way to do it is to start at whatever is closest to par (the rate at which they neither credit you or charge you points; it's probably around 3% now).  Then do the breakeven math for the next more costly option (probably an eighth of a point or a quarter point lower rate, so 2.875% or 2.75%, whatever they happen to offer) as described above.  If you know you'll stay in the house and keep the mortgage that long, then you want to at least buy down the rate that much.  Keep buying down the rate until the breakeven doesn't make sense to you.

The other factor, besides living in the house, is keeping this mortgage.  If you plan to refinance for any reason, then paying points to buy down the rate is, as I think you mentioned in the OP, a waste of money.  That's what the lender generally counts on for large buy downs - you've prepaid them the interest but didn't keep the low rate long enough to break even.  Yes, you might be the rare bird who does stay in the house 30 years and keeps the mortgage that long, but the mortgage company knows that 99% of those who buy down the rate that much won't do it; they may lose money on you but make it up on the other 99% of people.

You might refinance to change to a 15 year or 10 year at some point; that's what I did because my mortgage balance got low enough that the payment on a 10 year was still comfortable and I could get a lower rate on a 10 year note than I could on a 15 or 30 year note, and it was lower than my previous mortgage rate.

As a side note, when I was doing this math for my mortgages - my house has been paid off for maybe seven years now - it becomes pretty obvious where the sweet spot is.  After a couple of times doing the math exercise, you can even start to see it in the figures on the rate sheets.

What lender are you going with, just out of curiosity?  I'm curating lenders on behalf of my son.

jeromedawg

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Re: When should we lock in our mortgage loan rate?
« Reply #5 on: June 04, 2021, 12:00:15 AM »
I'd personally lock as soon as both (a) I knew that the house will close before the lock expires, and (b) I could afford the payment on the mortgage.  For (a), this would mean that all the contingencies have been satisfied and removed by both sides.  For (b), this means that I'd be OK with whatever payment it'd end up being.

As far as points, I would divide the cost of the buy down by the difference in interest rate to determine a payback period.  If I knew I would stay in the home and keep this mortgage longer than that, then I would buy down.  Otherwise I wouldn't.  So for example, the difference in discount points for the first two options you list is $2800 ($1200 plus $1600).  The difference in rates is 0.125% times the $420K = $525 per year.  $2800 / $525 is about 5.3 years.  Will you stay in the house and keep this mortgage that long?

Regarding this point in the difference, we plan to live here longer than 5 years so which of those rates would I take in the case of your example? If I planned to stay no more than 5 years would I take the higher rate with higher credit? And if I plan to longer than 5 years (but maybe no more than 10) then take the lower rate with lower credit? And if I were to plan to stay as long as I possibly could (even to retirement) then commit to the lowest rate possible and pay down? I got the full rate schedule and 2.125% would cost $10,260.60 but this would in fact yield the least amount of interest paid over that 30 year period.

EDIT: I should mention for the lock there is no fee. Another thing is that if we were to do a 15 day lock, we could get a slight discount but I'm not really considering this as a factor to justify waiting longer than needed (it's a matter of a couple hundred bucks I think haha)

If you have the full rate schedule, the easiest way to do it is to start at whatever is closest to par (the rate at which they neither credit you or charge you points; it's probably around 3% now).  Then do the breakeven math for the next more costly option (probably an eighth of a point or a quarter point lower rate, so 2.875% or 2.75%, whatever they happen to offer) as described above.  If you know you'll stay in the house and keep the mortgage that long, then you want to at least buy down the rate that much.  Keep buying down the rate until the breakeven doesn't make sense to you.

The other factor, besides living in the house, is keeping this mortgage.  If you plan to refinance for any reason, then paying points to buy down the rate is, as I think you mentioned in the OP, a waste of money.  That's what the lender generally counts on for large buy downs - you've prepaid them the interest but didn't keep the low rate long enough to break even.  Yes, you might be the rare bird who does stay in the house 30 years and keeps the mortgage that long, but the mortgage company knows that 99% of those who buy down the rate that much won't do it; they may lose money on you but make it up on the other 99% of people.

You might refinance to change to a 15 year or 10 year at some point; that's what I did because my mortgage balance got low enough that the payment on a 10 year was still comfortable and I could get a lower rate on a 10 year note than I could on a 15 or 30 year note, and it was lower than my previous mortgage rate.

As a side note, when I was doing this math for my mortgages - my house has been paid off for maybe seven years now - it becomes pretty obvious where the sweet spot is.  After a couple of times doing the math exercise, you can even start to see it in the figures on the rate sheets.

What lender are you going with, just out of curiosity?  I'm curating lenders on behalf of my son.

I think we're still having trouble understanding the concept - it's actually quite confusing for myself and my wife maybe understands slightly more but probably because she's an accountant and has worked with a lot more numbers than I have. But for both of us this is the first time we've taken a mortgage so it's pretty foreign.
So when you say "keep buying down the rate until the breakeven doesn't make sense to you" does that practically translate to keep paying for more points until it gets to some ridiculous number like more than 30 years?

As far as the lender, I'll PM you


secondcor521

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Re: When should we lock in our mortgage loan rate?
« Reply #6 on: June 04, 2021, 09:28:16 AM »
I'd personally lock as soon as both (a) I knew that the house will close before the lock expires, and (b) I could afford the payment on the mortgage.  For (a), this would mean that all the contingencies have been satisfied and removed by both sides.  For (b), this means that I'd be OK with whatever payment it'd end up being.

As far as points, I would divide the cost of the buy down by the difference in interest rate to determine a payback period.  If I knew I would stay in the home and keep this mortgage longer than that, then I would buy down.  Otherwise I wouldn't.  So for example, the difference in discount points for the first two options you list is $2800 ($1200 plus $1600).  The difference in rates is 0.125% times the $420K = $525 per year.  $2800 / $525 is about 5.3 years.  Will you stay in the house and keep this mortgage that long?

Regarding this point in the difference, we plan to live here longer than 5 years so which of those rates would I take in the case of your example? If I planned to stay no more than 5 years would I take the higher rate with higher credit? And if I plan to longer than 5 years (but maybe no more than 10) then take the lower rate with lower credit? And if I were to plan to stay as long as I possibly could (even to retirement) then commit to the lowest rate possible and pay down? I got the full rate schedule and 2.125% would cost $10,260.60 but this would in fact yield the least amount of interest paid over that 30 year period.

EDIT: I should mention for the lock there is no fee. Another thing is that if we were to do a 15 day lock, we could get a slight discount but I'm not really considering this as a factor to justify waiting longer than needed (it's a matter of a couple hundred bucks I think haha)

If you have the full rate schedule, the easiest way to do it is to start at whatever is closest to par (the rate at which they neither credit you or charge you points; it's probably around 3% now).  Then do the breakeven math for the next more costly option (probably an eighth of a point or a quarter point lower rate, so 2.875% or 2.75%, whatever they happen to offer) as described above.  If you know you'll stay in the house and keep the mortgage that long, then you want to at least buy down the rate that much.  Keep buying down the rate until the breakeven doesn't make sense to you.

The other factor, besides living in the house, is keeping this mortgage.  If you plan to refinance for any reason, then paying points to buy down the rate is, as I think you mentioned in the OP, a waste of money.  That's what the lender generally counts on for large buy downs - you've prepaid them the interest but didn't keep the low rate long enough to break even.  Yes, you might be the rare bird who does stay in the house 30 years and keeps the mortgage that long, but the mortgage company knows that 99% of those who buy down the rate that much won't do it; they may lose money on you but make it up on the other 99% of people.

You might refinance to change to a 15 year or 10 year at some point; that's what I did because my mortgage balance got low enough that the payment on a 10 year was still comfortable and I could get a lower rate on a 10 year note than I could on a 15 or 30 year note, and it was lower than my previous mortgage rate.

As a side note, when I was doing this math for my mortgages - my house has been paid off for maybe seven years now - it becomes pretty obvious where the sweet spot is.  After a couple of times doing the math exercise, you can even start to see it in the figures on the rate sheets.

What lender are you going with, just out of curiosity?  I'm curating lenders on behalf of my son.

I think we're still having trouble understanding the concept - it's actually quite confusing for myself and my wife maybe understands slightly more but probably because she's an accountant and has worked with a lot more numbers than I have. But for both of us this is the first time we've taken a mortgage so it's pretty foreign.
So when you say "keep buying down the rate until the breakeven doesn't make sense to you" does that practically translate to keep paying for more points until it gets to some ridiculous number like more than 30 years?

As far as the lender, I'll PM you

In reverse order - thanks for the PM.

The only other part to "doesn't make sense" that I left out of my previous post is that it would be wise to take into account your risk tolerance and how confident you are in your guesses as to how long you'll have that mortgage.

In the previous example, I calculated a breakeven of 5.3 years, which would mean if you kept this mortgage longer than that, it would be a good idea to buy down the rate (aka pay the points).  If you kept the mortgage a shorter period (either because you moved, or because you refinanced), then you would have wasted some money and buying down the rate would have been a mistake.

Well, you can't guess the future.  But you can probably guess how certain or uncertain it is.

Maybe you and your wife are very methodical people and have carefully planned out your career paths and whether you're going to have kids and when and how many.  And the new house is near your existing jobs that you know you're going to stay in, and there are the right number of bedrooms for those kids you're planning on.  And you know that you'll be in the house 8 to 10 years because that's when you'll hit your FI number, and you'll sell this house and move to the mountains.  And you have extra money laying around so whether or not you optimize this $2800 is NBD.

Or maybe you haven't figured out what you want to be when you grow up, and you have fertility issues so you may have to do IVF, which increases the chance of triplets.  And your investment in AMC and dogecoin may make you a millionaire next week you're not really sure.  And your wife has talked about moving to Houston.  And you're scraping every nickel to buy this house.

In the first case, buying down the points makes sense, because you're confident you'll have that mortgage long enough to break even.  In the second case, maybe it's better to not buy down the points because although it might pay off, it might not, and you really can't afford to take the risk.

Hope that helps.  If it's just the math of how to do a breakeven that's confusing, I can try to answer specific questions about that.  Or if it's about what the breakeven means, I can also answer specific questions about that.  If it's about discount rates, I can answer specific questions about that (although I'm not as good on the topic about how to pick a discount rate, which is part of that discussion).

jeromedawg

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Re: When should we lock in our mortgage loan rate?
« Reply #7 on: June 04, 2021, 09:41:09 AM »
I'd personally lock as soon as both (a) I knew that the house will close before the lock expires, and (b) I could afford the payment on the mortgage.  For (a), this would mean that all the contingencies have been satisfied and removed by both sides.  For (b), this means that I'd be OK with whatever payment it'd end up being.

As far as points, I would divide the cost of the buy down by the difference in interest rate to determine a payback period.  If I knew I would stay in the home and keep this mortgage longer than that, then I would buy down.  Otherwise I wouldn't.  So for example, the difference in discount points for the first two options you list is $2800 ($1200 plus $1600).  The difference in rates is 0.125% times the $420K = $525 per year.  $2800 / $525 is about 5.3 years.  Will you stay in the house and keep this mortgage that long?

Regarding this point in the difference, we plan to live here longer than 5 years so which of those rates would I take in the case of your example? If I planned to stay no more than 5 years would I take the higher rate with higher credit? And if I plan to longer than 5 years (but maybe no more than 10) then take the lower rate with lower credit? And if I were to plan to stay as long as I possibly could (even to retirement) then commit to the lowest rate possible and pay down? I got the full rate schedule and 2.125% would cost $10,260.60 but this would in fact yield the least amount of interest paid over that 30 year period.

EDIT: I should mention for the lock there is no fee. Another thing is that if we were to do a 15 day lock, we could get a slight discount but I'm not really considering this as a factor to justify waiting longer than needed (it's a matter of a couple hundred bucks I think haha)

If you have the full rate schedule, the easiest way to do it is to start at whatever is closest to par (the rate at which they neither credit you or charge you points; it's probably around 3% now).  Then do the breakeven math for the next more costly option (probably an eighth of a point or a quarter point lower rate, so 2.875% or 2.75%, whatever they happen to offer) as described above.  If you know you'll stay in the house and keep the mortgage that long, then you want to at least buy down the rate that much.  Keep buying down the rate until the breakeven doesn't make sense to you.

The other factor, besides living in the house, is keeping this mortgage.  If you plan to refinance for any reason, then paying points to buy down the rate is, as I think you mentioned in the OP, a waste of money.  That's what the lender generally counts on for large buy downs - you've prepaid them the interest but didn't keep the low rate long enough to break even.  Yes, you might be the rare bird who does stay in the house 30 years and keeps the mortgage that long, but the mortgage company knows that 99% of those who buy down the rate that much won't do it; they may lose money on you but make it up on the other 99% of people.

You might refinance to change to a 15 year or 10 year at some point; that's what I did because my mortgage balance got low enough that the payment on a 10 year was still comfortable and I could get a lower rate on a 10 year note than I could on a 15 or 30 year note, and it was lower than my previous mortgage rate.

As a side note, when I was doing this math for my mortgages - my house has been paid off for maybe seven years now - it becomes pretty obvious where the sweet spot is.  After a couple of times doing the math exercise, you can even start to see it in the figures on the rate sheets.

What lender are you going with, just out of curiosity?  I'm curating lenders on behalf of my son.

I think we're still having trouble understanding the concept - it's actually quite confusing for myself and my wife maybe understands slightly more but probably because she's an accountant and has worked with a lot more numbers than I have. But for both of us this is the first time we've taken a mortgage so it's pretty foreign.
So when you say "keep buying down the rate until the breakeven doesn't make sense to you" does that practically translate to keep paying for more points until it gets to some ridiculous number like more than 30 years?

As far as the lender, I'll PM you

In reverse order - thanks for the PM.

The only other part to "doesn't make sense" that I left out of my previous post is that it would be wise to take into account your risk tolerance and how confident you are in your guesses as to how long you'll have that mortgage.

In the previous example, I calculated a breakeven of 5.3 years, which would mean if you kept this mortgage longer than that, it would be a good idea to buy down the rate (aka pay the points).  If you kept the mortgage a shorter period (either because you moved, or because you refinanced), then you would have wasted some money and buying down the rate would have been a mistake.

Well, you can't guess the future.  But you can probably guess how certain or uncertain it is.

Maybe you and your wife are very methodical people and have carefully planned out your career paths and whether you're going to have kids and when and how many.  And the new house is near your existing jobs that you know you're going to stay in, and there are the right number of bedrooms for those kids you're planning on.  And you know that you'll be in the house 8 to 10 years because that's when you'll hit your FI number, and you'll sell this house and move to the mountains.  And you have extra money laying around so whether or not you optimize this $2800 is NBD.

Or maybe you haven't figured out what you want to be when you grow up, and you have fertility issues so you may have to do IVF, which increases the chance of triplets.  And your investment in AMC and dogecoin may make you a millionaire next week you're not really sure.  And your wife has talked about moving to Houston.  And you're scraping every nickel to buy this house.

In the first case, buying down the points makes sense, because you're confident you'll have that mortgage long enough to break even.  In the second case, maybe it's better to not buy down the points because although it might pay off, it might not, and you really can't afford to take the risk.

Hope that helps.  If it's just the math of how to do a breakeven that's confusing, I can try to answer specific questions about that.  Or if it's about what the breakeven means, I can also answer specific questions about that.  If it's about discount rates, I can answer specific questions about that (although I'm not as good on the topic about how to pick a discount rate, which is part of that discussion).

You're welcome on the PM.

I'm not sure where the best place is to check rates currently but I think they may have gone up again today? We were close to locking in but our lender was suggesting maybe to hold off a day - we literally just started talking about locking rates *yesterday* so it's like getting dropped into the deep end of the pool :T That said, last night we were playing around with some of the 'figures' and I think, for us, the 2.50% rate made sense. It was basically the smallest amount we would buy down (the next thing up would be to receive a credit) and we calculated that we would need 3 years to "break even" - we will likely be there longer than that but there are some minor uncertainties. I've attached a screenshot of the quick spreadsheet I came up with using a slightly different formula ("cost/fee at current rate" divided by "diff of next higher rate and current rate" divided by 12 = rough # of years to break even) - not sure if that makes any sense but I think it might be close. I got it from some website (forgot which one haha).




uniwelder

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Re: When should we lock in our mortgage loan rate?
« Reply #8 on: June 04, 2021, 09:58:09 AM »
Jeromedawg--- I think there's a mistake in your calculations.  I'm getting about 7-9 year breakeven for each case based on the spreadsheet.

edited to add--- based on the little I know of your situation, I'd stick with the 2.5%
« Last Edit: June 04, 2021, 10:02:08 AM by uniwelder »

jeromedawg

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Re: When should we lock in our mortgage loan rate?
« Reply #9 on: June 04, 2021, 10:03:58 AM »
Jeromedawg--- I think there's a mistake in your calculations.  I'm getting about 7-9 year breakeven for each case based on the spreadsheet.

edited to add--- based on the little I know of your situation, I'd stick with the 2.5%

Thanks. What is the formula that you're using? We're leaning towards 2.5% too

Just got the updated rates from our lender. Fees dropped ever so slightly I think part in due to the job report - 559k added and they were estimating 650k+ strong
« Last Edit: June 04, 2021, 10:09:04 AM by jeromedawg »

uniwelder

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Re: When should we lock in our mortgage loan rate?
« Reply #10 on: June 04, 2021, 10:10:12 AM »
Jeromedawg--- I think there's a mistake in your calculations.  I'm getting about 7-9 year breakeven for each case based on the spreadsheet.

edited to add--- based on the little I know of your situation, I'd stick with the 2.5%

Thanks. What is the formula that you're using? We're leaning towards 2.5% too

I think I'm calculating the same way you described.  It just seems there might be a typo in Excel.  Take the 2.25% rate for example----

(6,682-1,268)/(1,605-1659) = 5414/54 = 100 months = 8.3 years

secondcor521

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Re: When should we lock in our mortgage loan rate?
« Reply #11 on: June 04, 2021, 10:11:20 AM »
You've got the right idea, but the math in your spreadsheet appears to me to be quite wrong somehow.

Here's my math, let me know where we diverge:

1.  First, I'm going to take the two rows you seem to be referring to - the 2.50% and the 2.63% rows.

2.  Second, I'm going to make the minor assumption that 2.63% is actually 2.625% and your spreadsheet is just rounding.

3.  Looking at the credit/fee column, I calculate the difference between the two rows as $1268.40 - -$1612.80 = $1268.40 + $1612.80 = $2,881.20.  In other words, you'll have to cough up $2,881.20 more at closing to get the 2.50% rate compared to the amount you'd have to pay at the 2.625% rate.

4.  Looking at the monthly payment column, I calculate the difference between the two rows as $1,686.94 - $1,659.51 = $27.43.  In other words, if you go with the 2.50% rate, you'll pay $27.43 less per month than with the 2.625% rate.

5.  Dividing the result in step 3 by the result in step 4, I calculate $2,881.20 / $27.43 = 105.04.  In other words, it will take about 105 months of paying a $27.43 lower payment for you to get back the $2881.20 more that you paid at closing.

6.  Dividing the result in step 5 by 12, I get 105.04 / 12 = 8.75.  In other words, it will take about 8.75 years of paying a $27.43 lower payment for you to get back the $2881.20 more that you paid at closing.

I don't know how you get 3.85 years, but I'm pretty sure your calculation isn't right.  Maybe compare your formula to my logic above and see where it differs?

(I've done this pretty carefully, but it's also possible that I messed up the math somewhere.  I did get honors in my MBA program but I still missed answers occasionally, and I'm rusty.)

...

The reason I get 8.75 years now vs. the 5.3 years earlier has to do with two things:  First, I was using your originally rounded figure of $2800 instead of the actual figure of $2881.20.  Second, I was just multiplying the rate difference by the initial mortgage principal, which overstates the interest savings because after the first month, your interest rate is being applied to a smaller balance.  The 8.75 figure is a better one because it is based on the actual figures and takes into account the mortgage principal paydown over time because it's based on monthly payments.

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Re: When should we lock in our mortgage loan rate?
« Reply #12 on: June 04, 2021, 10:15:23 AM »
Jeromedawg--- I think there's a mistake in your calculations.  I'm getting about 7-9 year breakeven for each case based on the spreadsheet.

edited to add--- based on the little I know of your situation, I'd stick with the 2.5%

Thanks. What is the formula that you're using? We're leaning towards 2.5% too

Just got the updated rates from our lender. Fees dropped ever so slightly I think part in due to the job report - 559k added and they were estimating 650k+ strong

Once you straighten out the breakeven math, I personally would not try to drive myself crazy on day to day swings in the rates.  Nobody knows what'll happen in the next week, not even your mortgage officer.  If I were OK with the rate today and got the math right on the breakeven stuff, and knew the lock will last long enough, I would just go ahead and lock.  There is no need to take the risk that the rate might rise and make the home unaffordable, and rates are probably not going to drop enough to where it makes much difference to where you end up financially in 10 years.

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Re: When should we lock in our mortgage loan rate?
« Reply #13 on: June 04, 2021, 10:17:48 AM »
  Be happy rates are as low as they are. My 1st house was @ about 7% .  I'm sure lots of folks on here have paid more.

 I tried to get mortgage brokers to give me the relevant "index"  that mortgage rates tracked, when considering a 'lock' , and the best answer i got [ which may or may not be true ]  was " The 10 year Federal Gov't Treasury Bond interest rate " .
   So i watched it for a week or so, -  I couldn't figure out a solid rhyme or reasoning as to why it moved in miniscule up or down increments over that period, and i locked the interest rate offer at the current offering after a week of sitting on the fence...

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Re: When should we lock in our mortgage loan rate?
« Reply #14 on: June 04, 2021, 10:19:41 AM »
Jeromedawg--- I think there's a mistake in your calculations.  I'm getting about 7-9 year breakeven for each case based on the spreadsheet.

edited to add--- based on the little I know of your situation, I'd stick with the 2.5%

Thanks. What is the formula that you're using? We're leaning towards 2.5% too


I think I'm calculating the same way you described.  It just seems there might be a typo in Excel.  Take the 2.25% rate for example----

(6,682-1,268)/(1,605-1659) = 5414/54 = 100 months = 8.3 years

Ah okay, I was forgetting to take the difference between the fees (sigh) so I think that might have been it. That said, I'm a bit confused to your calculation as you jumped up from 2.25 to 2.50, skipping 2.375... so what does the 8.3 years actually mean or how does that translate in relation to what kind of decision you'd be making between 2.5 and 2.25?

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Re: When should we lock in our mortgage loan rate?
« Reply #15 on: June 04, 2021, 10:23:38 AM »
You've got the right idea, but the math in your spreadsheet appears to me to be quite wrong somehow.

Here's my math, let me know where we diverge:

1.  First, I'm going to take the two rows you seem to be referring to - the 2.50% and the 2.63% rows.

2.  Second, I'm going to make the minor assumption that 2.63% is actually 2.625% and your spreadsheet is just rounding.

3.  Looking at the credit/fee column, I calculate the difference between the two rows as $1268.40 - -$1612.80 = $1268.40 + $1612.80 = $2,881.20.  In other words, you'll have to cough up $2,881.20 more at closing to get the 2.50% rate compared to the amount you'd have to pay at the 2.625% rate.

4.  Looking at the monthly payment column, I calculate the difference between the two rows as $1,686.94 - $1,659.51 = $27.43.  In other words, if you go with the 2.50% rate, you'll pay $27.43 less per month than with the 2.625% rate.

5.  Dividing the result in step 3 by the result in step 4, I calculate $2,881.20 / $27.43 = 105.04.  In other words, it will take about 105 months of paying a $27.43 lower payment for you to get back the $2881.20 more that you paid at closing.

6.  Dividing the result in step 5 by 12, I get 105.04 / 12 = 8.75.  In other words, it will take about 8.75 years of paying a $27.43 lower payment for you to get back the $2881.20 more that you paid at closing.

I don't know how you get 3.85 years, but I'm pretty sure your calculation isn't right.  Maybe compare your formula to my logic above and see where it differs?

(I've done this pretty carefully, but it's also possible that I messed up the math somewhere.  I did get honors in my MBA program but I still missed answers occasionally, and I'm rusty.)

...

The reason I get 8.75 years now vs. the 5.3 years earlier has to do with two things:  First, I was using your originally rounded figure of $2800 instead of the actual figure of $2881.20.  Second, I was just multiplying the rate difference by the initial mortgage principal, which overstates the interest savings because after the first month, your interest rate is being applied to a smaller balance.  The 8.75 figure is a better one because it is based on the actual figures and takes into account the mortgage principal paydown over time because it's based on monthly payments.

You're right. I re-did the math and I think it's correct now... taking a look again it actually seems like 2.375 (2.38 rounded in the sheet) is the 'sweet spot' here as it has the least # of years to breakeven (is *this* the right way to put the breakeven in context and think about it?). I guess between 2.5 and 2.375 there's not *that* big of a difference though.... $2335~ is a hefty amount to pay
« Last Edit: June 04, 2021, 10:26:57 AM by jeromedawg »

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Re: When should we lock in our mortgage loan rate?
« Reply #16 on: June 04, 2021, 10:38:36 AM »
  Be happy rates are as low as they are. My 1st house was @ about 7% .  I'm sure lots of folks on here have paid more.

 I tried to get mortgage brokers to give me the relevant "index"  that mortgage rates tracked, when considering a 'lock' , and the best answer i got [ which may or may not be true ]  was " The 10 year Federal Gov't Treasury Bond interest rate " .
   So i watched it for a week or so, -  I couldn't figure out a solid rhyme or reasoning as to why it moved in miniscule up or down increments over that period, and i locked the interest rate offer at the current offering after a week of sitting on the fence...

It is approximately true, and it's because while people are taking out 15 and 30 year mortgages all the time, people end up moving or refinancing all the time as well, and so the average length of a mortgage from the bank's perspective is about 10 years.

Lending to individual homeowners is more risky than lending to the federal government, but that level of riskiness is always approximately the same.  So the premium that the bank wants for doing "risky" mortgages is always a couple of percentage points.  If the federal government all of a sudden decided to pay 4% to the banks for a 10 year note, why would they want to lend to jeromedawg at below 3%, with all of the hassle and paperwork and risk that he accidentally burns his house down?  They wouldn't - they'd still want their couple of percentage points for the risk and the hassle, so the mortgage rate they'd offer jeromedawg would be more like 6%.

And yeah, there are a ton of things that affect global interest rates, and nobody knows what is going to happen with those factors even next week.

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Re: When should we lock in our mortgage loan rate?
« Reply #17 on: June 04, 2021, 10:55:15 AM »
You're right. I re-did the math and I think it's correct now... taking a look again it actually seems like 2.375 (2.38 rounded in the sheet) is the 'sweet spot' here as it has the least # of years to breakeven (is *this* the right way to put the breakeven in context and think about it?). I guess between 2.5 and 2.375 there's not *that* big of a difference though.... $2335~ is a hefty amount to pay

Yeah, that formula in the formula bar is correct.  Assuming you copied it down, then I'll trust the other numbers as well.

What I would do is pay all the points that I was willing to wait that long for payback.  Are you willing to wait 8.75 years?  If so, then do that one.  Are you willing to wait 7.16 years?  If so, then do that one too.

By the way, you can copy that formula up to the blank cells above and get payback periods for rates where the lender is crediting you as well.  Maybe it makes sense to take a lender credit, especially if you'll only be in the house a few years.

Copy the formula from cell E9 to E3 through E8.  (E2 won't work because you don't have a scenario in row 1 to compare it to.)  You'll probably see lower numbers / shorter payback periods.

How long did you say you're confident you'd be in the house?  Are you stretching for the down payment and closing costs, or do you have extra money lying around?

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Re: When should we lock in our mortgage loan rate?
« Reply #18 on: June 04, 2021, 11:14:43 AM »
You're right. I re-did the math and I think it's correct now... taking a look again it actually seems like 2.375 (2.38 rounded in the sheet) is the 'sweet spot' here as it has the least # of years to breakeven (is *this* the right way to put the breakeven in context and think about it?). I guess between 2.5 and 2.375 there's not *that* big of a difference though.... $2335~ is a hefty amount to pay

Yeah, that formula in the formula bar is correct.  Assuming you copied it down, then I'll trust the other numbers as well.

What I would do is pay all the points that I was willing to wait that long for payback.  Are you willing to wait 8.75 years?  If so, then do that one.  Are you willing to wait 7.16 years?  If so, then do that one too.

By the way, you can copy that formula up to the blank cells above and get payback periods for rates where the lender is crediting you as well.  Maybe it makes sense to take a lender credit, especially if you'll only be in the house a few years.

Copy the formula from cell E9 to E3 through E8.  (E2 won't work because you don't have a scenario in row 1 to compare it to.)  You'll probably see lower numbers / shorter payback periods.

How long did you say you're confident you'd be in the house?  Are you stretching for the down payment and closing costs, or do you have extra money lying around?


Thanks for the input and help. We intend to be here at least until the kids are off to college (currently they are 5 and 4 so one is starting K soon - we delayed him a year). For the downpayment we actually lowered it from what we were going to put in so the loan is a bit higher. But I'd still consider it a slight stretch. We will have some extra funds laying around but are anticipating that most of it may go into repairs too (I'm estimating $20-30k worth of repairs *hopefully* at the high end.... ideally we'd love to get no higher than $20k but we'll see).