Chad, I’m interested in buying a home, but since I have been looking, rates have gone up. I have some that are telling me that rates may move down, but I am afraid they will go up even more. What should I do?
The first point I want to make is that there is no way anyone can predict which direction interest rates will move in the future — just as you can’t predict the movements in the stock market. Because of this uncertainty, even after you purchase, one of the most perplexing decisions someone has to make is when to lock in an interest rate on their new mortgage.
When you are purchasing a home, typically a mortgage company provides two options:
You can lock in the rate. Locking in your rate means that you are protected against future rate increases as long as you close on time. However, you cannot benefit if rates go down after you lock in your rate.
You can float the rate. Floating your rate means you are not protected against rate increases, but you can realize the benefit of rate decreases before settlement by locking in a rate closer to your settlement date.
What most homebuyers do not know is that there is a little-known third option which is available from only a few select lenders. This option is called a “cap and float,” which is designed to make the rate lock decision easier and less stressful. The cap and float option provides a standard rate lock which protects you against rising rates after you sign your purchase contract. It then goes one step further by allowing you to relock your rate if rates go down before closing. This takes the stress out of the decision. You can have the safety of a lock and get a lower rate if the market improves. It is a win-win situation.
Why don’t more lenders offer this option? I cannot speak for all lenders. Nor do I want to get too technical, but providing rate protection requires sophisticated secondary marketing expertise which enables a lender to protect themselves against volatile rate risk using advanced hedging techniques.
Playing the rate game can be very dangerous when purchasing a home because you never know when they will spike or fall. I hope that learning about this option will make you a bit less stressed about the rate decision because purchasing a home should be a fun and rewarding experience.
McLean Mortgage Corporation | NMLS ID: 99665 (www.nmlsconsumeraccess.org)