Stress is starting to run a little high with interest rates on the rise. Here’s a brief history lesson first! Over my 40-year history as a Realtor, I’ve seen a wide range of mortgage interest rates. In the early ‘80s, rates seemed like they were going up every day, and in October 1981, the Freddie Mac rate soared to 18.44%! I can remember thinking, if only the rates would just go back down to 12% all would be right with the world. Rates did gradually get better, even with many ups and downs, but the valley was in October 2012 at the end of the recession when it dropped to a record low of 3.36%. You know the old saying, “What goes up must come down!”. In the world of interest rates, there’s also another adage: “What goes down must come up!”. From that low in 2012 of 3.36%, the rate bumped up to 3.52% in October 2016, then increased to 3.91% in October of 2017, and now in October 2018, it’s 4.86%. It appears there is still pressure to push them higher. 5 or 6% is still a really good rate, just higher than the low rates we have been spoiled by from 2012 through 2017.
Over the last several years, we enjoyed those record-low mortgage rates and a prevailing sense of relative stability. During times of stability, the question as to whether to lock the interest rate while you are under contract on a home, isn’t as critical as in times of rising interest rates. In recent months, there has been upward pressure on rates, making it a more relevant conversation.
To lock or not to lock, that is the buyer’s choice. However, buyers need to understand that is a commitment from both the lender and the buyer to close at the agreed upon interest rate.
The scenario goes like this. One day you write a contract on a home knowing you can afford it at a certain interest rate. Then while you are waiting to close, the interest rate increases, and you can no longer afford the monthly payment. Locking the interest rate in with the lender would have prevented this unfortunate circumstance.
First of all, what is a “lock”?
A rate lock is a commitment from a lender to fix your interest rate between time of contract and closing, even if rates go up. It is important to remember that is a “lock is a lock.” It is also a commitment from the buyer to close on the terms of the lock. Even if interest rates go down, you are locked in and committed to close as agreed.
The lender might suggest that the buyer should “float” rather than lock. This means that in the lender’s opinion, there could be an event in the next few days or weeks that may cause rates to go lower. Then you could make a decision to lock at a later time instead.
Over my 40-year career, I have found that in general, interest rates tend to go down slow and rise fast. With that experience in mind, it is usually best to lock in a rate if the general trend is upwards. There is a greater chance of rates going up 1% in a day than there is going down 1% in a day. If you’re happy with the interest rate the day you write a contract on a home, lock it in so you and all the others involved in the transaction can sleep at night.
Market conditions dictate the type and pricing of rate locks that lenders may offer. Sometimes a 30-day or even a 60-day rate lock might be “free.” Extended locks usually come with a price tag. Make sure you communicate with your lender to make sure you have a full understanding of how it works. It would also be good to ask the lender what happens if there is a delay in closing. There might be a possibility to extend the lock, but lock extensions usually involve a fee.
All interest rate locks have a deadline. Knowing that deadline helps structure a contract with dates for conditions and final closing to happen before the lock expires with a closing date that falls within the deadline. In some market conditions, lenders have even been known to offer “lock and shop.” This is a situation where the lender will lock in your loan rate even before writing a contract.
Locks can also be a major consideration in new construction. If you have a dirt start on a home, that could mean you may not be closing for six to eight months. It is hard to say what could happen to interest rates in that timeframe. Most builder contracts say that you will close on the home at whatever the market rate of interest is. In order to protect yourself, it would be a good idea to check with the lender to see what the expense of a long-term lock would be. Market conditions will dictate pricing for long-term locks. An alternative could be to “float” with the interest rate market. Instead of paying the lock fee in advance, you could save that money to buy the rate down at time of closing. Of course, market conditions will dictate whether or not that turns out to be a good idea.
To lock or not to lock? Hopefully, this information will help you make that decision. Be sure to consult your lender and any other advisors in order to make an informed decision based on current market conditions.
By Duane Duggan. Duane is an award-winning Realtor and author of the book, “Realtor for Life”. He has been a Realtor for RE/MAX of Boulder since 1982 and has facilitated over 2,500 transactions over his career. Living the life of a Realtor and being immersed in real estate led to the inception of his book, Realtor for Life. For questions, e-mail Duane at DuaneDuggan@boulderco.com, call 303.441.5611 or visit boulderco.com.