Interest rates are arguably one of the most important financial factors that current and potential homeowners discuss when considering a purchase or refinance. That’s actually why January’s Home Matters was about understanding mortgage rates and the factors that comprise them. Since your interest rate essentially determines the overall cost of borrowing the money for your loan, it’s important to shop around for interest rates and discuss the options with your lender to make sure you’re getting the best deal on your loan.
Without getting too into the weeds, lenders base the interest rates they offer on the Federal Funds rate, which is determined by the Federal Reserve. The Federal Reserve regulates this target rate based on indications of economic growth, such as jobs data, consumer confidence or levels of inflation. After the financial crisis, rates were held at all-time lows by the Federal Reserve to help boost the economy and encourage businesses and consumers to borrow money. Conversely, in times of growth, the Fed may raise rates to regulate the speed at which the economy is growing, as they did on March 15th.
When you’re ready discuss your financing options with your lender for either a home purchase or refinance, you’ll probably be presented with the choice to lock your rate and commit to a mortgage or “float” your rate for a while. There are pros and cons to both options, though they may depend on the loan program and the guidelines your particular lender implements.
So, why lock your rate?
Locking your interest rate guarantees that you will be borrowing your loan at that set rate, provided you qualify for the mortgage. A rate lock can last anywhere from 10 to 60 days, and sometimes even longer, oftentimes with higher fees for a longer lock period. However, a buyer may consider spending more on a longer lock if they need more time to close on a home, but don’t want to miss out on a low interest rate.
If mortgage rates are currently favorable and have the potential to rise, locking in gives you financial security against a potential rate increase in the future. On the flip side, if rates are higher or have the potential to drop, you may be preemptively foregoing a better deal.
And the benefit of floating the rate?
Some lenders will allow you to start the mortgage process without locking into a specific interest rate, so you can wait for a potential rate drop. The risk, however, is that you won’t have the security of a rate lock if rates increase while you’re exploring options. Some lenders may also offer a float-down option, which means you can lock in upfront and then float down to a lower rate if rates decrease before the loan closes. Confirm whether your lender charges an additional fee with this option.
How to Decide on the Best Option
Keep in mind that lenders’ rates can change daily and throughout the day. Ultimately, waiting for the “best” rate is like aiming to hit a moving target, and your decision will boil down to how risk averse you want to be. Given that a home purchase can be one of the biggest financial decisions of your life, locking into a rate shouldn’t be a gamble. There’s only so much you and your lender can anticipate in terms of rate fluctuations.
It’s crucial to keep an eye on the outcome of the Fed’s monthly meetings in case they change rates. You should also rely on your lender’s expertise and tenure in the industry to help guide you on the current and projected state of rates. By closely monitoring market conditions and consulting with your lender, you can make an informed decision on when to act.