To "Lock" or to "Float"?
TO "LOCK" OR TO "FLOAT"?
It is very important for home buyers or for those who want to re-finance to be aware that in these volatile financial markets we are living in, interest rates on mortgages can fluctuate substantially in a matter of hours! A case in point: A few hours after the Chairman of the Federal Reserve announced their plan for decreasing the purchasing program of long-term bonds, mortgage interest rates jumped up almost a whole percentage point!
I have heard many stories from mortgage lenders about how they were able to lock a fantastic interest rate for a loan using a 2-3 hour "window of opportunity" that disappeared afterward, or others that missed out because they floated the loan (to "float" means to let the interest rate fluctuate with the market). Understanding how "locking-in" a rate works may help you evaluate your options and could result in thousands of dollars in savings!
So, what is a "lock"? A lock is a GUARANTEE from a lender that if you close your loan within a stipulated time (usually 30, maximum 60 days), the note on your loan (i.e. the nominal interest rate) will be set at a specific interest rate.
When you ask a lender for a quote (also called a "Good Faith Estimate" or GFE), you can ask how long the rate is good for. Bear in mind that until you lock the interest rate, it can (and probably will) change. If you think you need more time to close the transaction, ask the lender for an adjusted rate quote. If you are afraid that interest rates may rise, lock your rate now (rate locks are recommended when interest rates are on the rise, to avoid ending up with higher monthly payment than anticipated). Floating the loan in a volatile market is a gamble - you may win if rates drop, but you may also lose if they go up.
What many people don't know is that long-term mortgage rates don't depend on the inter-bank rates set by the Federal Reserve Bank. This rate normally affects only short-term lending (such as credit cards, car loans, home equity lines, etc.). Long-term rates depend on the behavior of the financial (stock & bond) markets. Thus, if long-term bonds are in high demand, mortgage rates drop. Conversely, if stocks are in high demand and bonds are not, rates go up, to attract more investors.
Professional mortgage representatives are constantly checking the financial markets and related news releases to be able to predict future movements in interest rates. Ask your lender to keep an eye out for a favorable rate to lock in your loan! This is one of the reasons why it is very important to pick a very sharp and experienced mortgage representative (if you need a good lender, we can certainly recommend a few great ones...)
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