By Marilyn Kennedy Melia, CTW Features
Back in early July of this year, mortgage rates were roughly double where they sat at the same point in 2021.
But the path to today’s loftier level hasn’t been a straight ascent up. “Rates move when the financial markets move, “explains Jeffrey Loyd, of Mortgage Acuity in Hackensack, NJ.
For instance, when serious inflation looks less likely, rates could drop .2% in a short span.
On its face, a .2% drop seems insignificant. But with the National Association of Realtors estimating that average monthly costs rise about $400 for each percentage the rate rises; a drop of .2, or one-fifth of one percent, is worth about $80 monthly.
Often, explains Timothy Johnson of Warshaw Capital, Stamford, CT, when a borrower submits his complete loan application to a lender, the prevailing rate at that time is “locked” until the scheduled closing – which might be 30 or 45 days away.
But borrowers have the option of waiting to lock, hoping that a dip occurs before closing that they can pounce on. That’s a big gamble in today’s rising rate environment, notes Keith Gumbinger, of mortgage data site HSH.com. Johnson agrees with this sentiment: “In a market where the rates are falling, like they were in 2020, it wouldn’t make sense to lock immediately.”
Some banks and mortgage lending firms offer a “float down option”, which allows borrowers to initially lock in the prevailing rate, but automatically lock again if a specified size drop, like .2%, occurs before closing.
There’s a cost for this privilege, however, and borrowers need to calculate how long it would take to recoup that cost if the option is triggered, says Gumbinger. For instance, if a float down lock costs $1,500 and saves you $23.75 monthly if it’s triggered, it would take 63 months to break even. If you’re planning on moving again soon, it’s not worth it.
And, if rates never drop to the trigger level, the borrower is out the option fee. “The less a float-down option costs, the more value it can offer … and there’s less to lose,” says Gumbinger.