Why You Shouldn’t Be a Rate Watcher
Are you watching rates? There are different types of borrowers as it relates to rate-watching. Some speak with their mortgage broker and get a daily rate quote to decide whether or not to go ahead and refinance, or maybe someone is thinking about buying a rental property and the lower the rate the better the cash flow. Others dutifully follow economic reports that are released each and every day to see if interest rates will move one direction of the other.
If a particular economic report is released and it’s not very good news for the general economy, interest rates can fall. On the other hand, should some good news come out such as a dramatic drop in the unemployment rate or the GDP numbers show a strong economy, rates will move up. Sometimes, parsing out the various bits of data to try and predict where rates will be in a few weeks, can get a bit overwhelming. The truth is, nobody knows where rates are headed over the near term and especially over the long term.
Rate Changes: How it Works
For those who are paying attention to mortgage rates, really paying attention, they’ll soon discover that rates move in smaller increments, sometimes so small it’s barely noticeable. Sometimes rates don’t move at all from one day to the next. Or, the very same rate might cost $100 more to get or cost $100 less.
Let’s look at a scenario. Let’s say someone has a house under contract and is closing in 21 days. They’ve already submitted their loan application and have the preapproval letter in their hand which they used to accompany their offer. The pre-approval was based upon prevailing rates at the time the application was submitted to the lender. Lenders won’t lock in an interest rate until there is a property selected. But once the property is identified, borrowers can request a lock, in this example for 30 days. But this borrower wants to wait a while to see if rates fall a little more. 15 days go by. Then 20. Then 30. And now the mortgage broker is calling and saying that it’s time to lock to make sure loan papers are prepared on time.
But during this waiting period, rates have actually moved up. Not by a lot but up nonetheless. When rates are different than what was originally disclosed and used for a preapproval, the lender must submit the loan for a new approval based upon current market conditions. In this scenario, rates didn’t move up to the point where the buyers could no longer qualify, but they could have.
Here’s the deal- if you’re comfortable with current market rates, the prudent thing might be to go ahead and lock that rate in as a precautionary measure. If rates do fall, they’ll likely fall very slightly, not by anything such as 0.25% or 0.50%. Such a move would indicate something that completely shocked the financial markets. Remember, there are no prepayment penalties on mortgage loans any longer. If you lock and rates go down, you can always refinance.