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When Home Loan Market Is Volatile, Borrowers Wise to Lock in Rates

Beth Orenstein
LoanBiz Columnist

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Years ago, interest rates on home loans changed at most once or twice a week. Recently, however, interest rates on both fixed rate mortgages and adjustable rate mortgages have become much more volatile. "It is not uncommon today to see multiple changes in the same day," says Thomas S. Flad, area director of MetLife Home Loans in Allentown, Pennsylvania. In this unpredictable market, lenders and financial advisors recommend that borrowers lock in the rates once they are approved for their home loan. Holding out for the lowest or cheapest fixed rate mortgages can prove foolish.

Unpredictable Home Loan Rates Swing with Investment Trends

"When borrowers find a home loan that works for them, they should lock it in. This is not the type of market to be greedy or to be speculative," says Mark Frassica, a Certified Mortgage Planning Specialist with Equity Reach Mortgage Solutions Inc. in Arroyo Grande, California.

The stock market activity influences mortgage interest rates indirectly. When investors flee the stock market, they often park their money in bonds. In general, movement from the stock market to the bond market causes mortgage interest rates to fall, says Ryan Shoemaker, a Certified Mortgage Planning Specialist with The Private Mortgage Group in Omaha, Nebraska.

However, when investors regain their appetite for stocks, the reverse happens. Interest in mortgage backed bonds declines causing interest rates on home loans to rise, Shoemaker says.

Locking in Interest Rates on Home Loans Offers Peace of Mind 

No one knows when the volatility in the stock market will end. It looks like rates on home loans could be in for a wild ride for some time, lenders agree. In this climate, it is possible that the interest on the fixed rate mortgage a borrower was quoted in the morning could be invalid by the afternoon. "They could be worse, they could be better," Shoemaker says. Because it is so hard to predict which direction rates on home loans will move, financial planners say borrowers who are comfortable with the terms they are given should lock them in.  

"Locking in the rate on a home loan gives you the security of knowing you will be able to count on what your rate and payment will be when the loan closes," Flad says. "If you are comfortable with lender's terms and conditions for that home loan upfront, why not take a guarantee?"

Locks on Home Loan Interest Rates Typically Last One To Two Months

Most lenders allow borrowers to lock in rates on their home loans, whether they are fixed rate mortgages or adjustable rate mortgages, for 30 to 60 days. Some lock-in rate programs are for 45 days. Borrowers who are building a home or who for any number of reasons may not be able to close on their home loan within 90 days have options, too.

One program is called a rate cap/float down. "In those instances, a cap is placed upon upward rate movement. Usually, the rate will be limited to being 1/4 to 3/8 higher than the initial quote for up to a period of one year," Flad says. Usually, a fee is paid upfront to secure this option on home loans. However, the fee is often applied to the borrower's closing costs, and thus he does not pay more than he would have otherwise.

Lenders Renegotiate Home Loans When Rate Change Is Significant

Borrowers can always ask to renegotiate terms of their home loan if rates drop significantly before settlement. However, Flad warns, the renegotiated rate, although better than the initial rate, will not be as low as the current rates for home loans.

Sources:
  • Flad, Thomas, Interview by Beth W. Orenstein, 16 November 2008
  • Frassica, Mark, Interview by Beth W. Orenstein, 14 November 2008
  • Mortgage Bankers Association
  • Shoemaker, Ryan, Interview by Beth W. Orenstein, 14 November 2008

About the Author
Beth W. Orenstein, of Northampton, Pennsylvania, is a freelance real estate writer. A graduate of Tufts University, she majored in English.

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