Posts Tagged ‘lock-in’

Federal Reserve’s impact on rates

March 21, 2017

I feel like I spend a lot of time devoted to the topic of the Federal Funds Rate. The main reason is the misconception out there when it comes to the Federal Funds Rates. Last Wednesday, the Feds raised the Federal Funds Rate again. Every time this happens, I get calls and emails with people worrying about mortgage rates going up. That isn’t necessarily the case.

Mortgage rates are not determined by the Federal Funds Rate… car loans, credit card rates, second mortgages… those are impacted by the Federal Funds Rate.

Mortgage rates are determined by the value of Mortgage Backed Security Bonds (MBS bonds). As these bond values go up, mortgage rates go down. When these bond values fall, mortgage rates go up. Typically, when the Federal Funds Rate increases, it should help mortgage rates improve. Why?

MBS bonds hate inflation… I mean they can’t stand inflation. As inflation rises, MBS bond values plummet and make interest rates worse. As the Feds increase the Federal Funds Rate, it helps fight inflation. This, in turn, helps MBS bond values to rise, and mortgage rates to improve:

  • the Federal Funds Rate increased in December 2015. Over the next few months, mortgage rates improved by 0.500%. Rates stayed around these levels for all of 2016. Rates got worse at the end of 2016 after the election fueled a major stock market rally. That triggered another typical trend with rates… when stock values go up, bonds go down, and mortgage rates go up.
  • The Funds Rate was increased again in December 2016, and mortgage rates improved by 0.125% in the 6 weeks between Fed meetings.
  • We are about a week past the most recent rate increase by the Fed (third time since December 2015). So far, mortgage rates have improved by another 0.125%

What does this mean? When you hear a story about mortgage rates rising because of the Federal Funds Rate going up, don’t panic. The Funds Rate may go up, but mortgage rates could improve.

If you are looking to buy a home in Georgia, contact me today to get started. We have two tools to help you in an ever-changing rate market.

  • Float Down: Should rates improve after we’ve locked your rate, we can float it down at no cost to you one time during the loan process. If rates improve by 0.250% or more, we are within 30 days of closing, but 8 days prior to closing, we can float the rate down to current market value. That’s it. Easy! We have a three-week window to take advantage of this.
  • Lock-and-Shop: Worried that rates might go up? Don’t be. We can lock a rate for 60 days without being under contract to purchase a home. The rate is locked, find a home, and we start the loan process. The Float Down option as described above also applies to the Lock-and-Shop. So, you can get the protection of locking the rate, but also the opportunity to lower the rate should mortgage rates improve. The rate will not get worse so long as it is locked.

It is as simple as that!


Lock and Shop

February 1, 2011

When someone contacts me to get prequalified for a loan, one of the first questions involves locking in their interest rate. Traditionally, lenders do not allow borrowers to lock in an interest rate until they have a contract on a home. The rate lock is “attached” to a property and not a borrower.

Well, not everyone sees it that way!

We have a program known as “Lock and Shop.” Buyers can lock in their interest rate today without a purchase contract, and then go out looking for a home. The program typically works like this:

  • I prequalify a buyer to purchase a home.
  • Once prequalified, we can lock the borrower into a 60 day rate lock.
  • 60 days is a good time frame. This provides roughly 30 days to look for a home AND then 30 days to get a loan approved once there is a purchase contract. Plenty of time for both!
  • While I can lock in an interest rate prior to having a contract, underwriting will not commence until an executed purchase contract is provided.

This is a great program for buyers. They can go ahead and lock in a rate now, and not feel so pressured to find a home before rates could possibly get worse. With a 60 day lock, there really isn’t a rush on either side of the equation (finding a house and then getting loan approval). 60 days is more than enough time for both!

If you’d like to learn more about the lock and shop program for a property in Georgia, you know where to find me!

Lock-in Options for New Construction Contract

February 25, 2010

If you are in the process of building a new home (or under contract to purchase a new home which is currently under construction), you need to consider your options to protect and lock-in your interest rate.

Historically low mortgage rates (that is, fixed rate mortgages in the 4’s) may soon be a distant memory.  The Federal Reserves program to purchase mortgage backed-securities is coming to a close at the end of next month — March 2010.  This program which was announced on November 25, 2008 and then extended in March 2009 to purchase $1.25 trillion in agency mortgage-backed securities, has increased the demand for mortgages in the secondary market, pushing mortgage rates down to their lowest point in history.  Do you remember your high school economics class?  If the demand is high, price goes up.  And in the mortgage market, when the price goes UP, interest rates go DOWN.  As the demand goes down (the Feds stepping out at the end of March), prices will likely go down, and interest rates will go up.  Interest rates will go up as the Feds step out of the market, but how quickly and how high rates will move up is a topic open for debate.
So practically speaking, what does this mean for homebuyers currently in the process of building a new home? 
First, let’s look at an example: 
On a $400,000 mortgage, with a 30 year fixed rate mortgage at 4.875%, the principle and interest payment = $2,117 per month (taxes, insurance and private mortgage insurance additional, APR = 5.004).
Just for this example, let’s assume that with the Feds stepping out of the market, that mortgage rates will go up to the same level as the average rate for 2006 through 2008 at 6.0%.  At this rate, the principle and interest payment on a $400,000 mortgage = $2,398 per month (taxes, insurance and PMI additional, APR = 6.138).
This difference (between 4.875% and 6.0%) amounts to a difference of $281 per month.  This monthly difference translates to a total of $16,860 over five years and $33,720 over 10 years.
What can you do to protect yourself?
If you are under contract to build and purchase, lenders will allow you to lock-in and protect your mortgage rate as many as 180 days prior to closing.  The interest rate available and/or the cost for this extended rate lock protection varies based on the amount of time needed between the day you would like to lock-in and your closing date (45, 60, 90, 120, 150 and 180 day options are available).  And, just for reference, 120 days from today is June 25, 2010.
Continuing the example from above:
To lock-in a $400,000 mortgage for 120 days would cost an addition 1.5% discount points at closing = $6,000 (there is NO additional up-front fee to take advantage of the extended lock-in).  Assuming that interest rates did go up to 6.0%, the investment of $6,000 to protect your rate would pay itself back over 21 months.  So, even for a homeowner considering living in their new home for 5 years, taking advantage of the lower interest rate today, could save you as much as $10,000 (5 years savings = $16,860, less the additional $6,000 at closing = $10,860).
For more information and for details about your options to lock-in and protect your interest rate, please call (Georgia properties only).