By Holden Lewis • Bankrate.com
• Borrowers either lock a mortgage rate or float to keep options open.
• First-time homebuyers could user $8,000 credit to buy down rate.
• Refinancers who floated may not find it worthwhile at higher rate.
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Mortgage rates went up swiftly this week, and some would-be borrowers lost out dearly because they had not locked while rates were extremely low.
The question is: What should they do now?
When applying for a mortgage, borrowers are given the option of locking or floating. When you lock a rate, that’s the rate that you will get if you close on the loan by the lock expiration date. A lock protects you against a rate increase. But it’s also a commitment that you will pay that rate, even if rates fall between the day you lock and the day you close.
When you float a rate, you’re keeping your options open. If rates drop, you can lock then and brag about how smart you are. But if rates rise, you might get stuck with a higher-than-desired rate and monthly mortgage payment.
On Tuesday and Wednesday, mortgage rates went up half a percentage point or more. The increase was abrupt and startling. For people who had already locked a rate and who were on track to close on time, the jump in rates was no big deal. But for those who were floating, this week’s rate rise could be costly.
What should you do if you were floating the mortgage rate and got caught in the rate updraft?
It depends upon whether you’re buying or refinancing.
Advice for buyers
“If they’re first-time homebuyers, I’m telling them the government’s giving them $8,000 anyway. So they might as well buy the rate down,” says Jeff Tufford, mortgage consultant for Monarch Mortgage Consulting in Grand Blanc, Mich.
He’s referring to this year’s first-time homebuyer tax credit, which allows qualified buyers to reduce their federal income tax bill by 10 percent or $8,000, whichever is less. Tufford would tell these first-time buyers to use the money to pay discount points so they can get the rate back down to where it was before the rate increase.
If the borrower is buying a house but isn’t qualified to collect the tax credit, “it’s kind of like if you’ve got to close it, well, close it, and maybe refinance in the future,” Tufford says.
Advice for refinancers
But what about homeowners who wanted to refinance at super-low rates? Christopher Cruise, senior loan officer for GOTeHomeLoans.com, says most of those folks will be disappointed.
“There are going to be some people who were right on the bubble, where 5 percent doesn’t make sense (to refinance) but 4.5 percent did,” Cruise says. “They’re going to lose $400 in appraisal money.”
So they get bad news on top of bad news: Not only will they not get the loan, but their paid-for appraisal will go to waste. Maybe. Such clients will be put in the “waiting for rates to drop” category in the lender’s customer-relationship management software. If rates drop, the software will tell the broker to call and deliver the welcome news.
Is there a lesson to be learned here? Maybe not. Loan originators can deliver persuasive speeches to their clients about the wisdom of locking when rates are at 50-year lows, but borrowers often want to float in the hope of grabbing the lowest rate possible. Trouble is, no one can know that rates have hit their lowest point until they’ve bounced higher.
“When borrowers float and the rates go down, they consider themselves geniuses,” Cruise says. “When they float and the rates go up, they’re mad at us for not forcing them to lock.”