When do you lock your mortgage rate?

Locking your interest rate protects you from increases due to market conditions.  Locking early safeguards your budgeted payment.  By locking the rate, if the market goes up, you get the lower rate; if it goes down after the lock, you may be able to pay a fee and lower the rate.

Knowing when to take the lock is determined by which direction you think the market is going.  If you think rates are going up, lock in early.  If you think rates are going down, ride the rate to within a few days of closing.

Some lenders may allow a borrower to lock a rate after pre-approval but is more common to not offer a lock until there is a signed contract on a home.  Even with a pre-approval, it could easily take 30 days or more to close a transaction and the rates can move a lot in that period.

There may be a fee charged to lock a rate which is determined by the lender.  Generally, the longer the time for the rate lock, the higher the fee.

There is a lock period established by the lender that guarantees the rate, if the loan is closed by the expiration date.  Normal lock periods can be between 30 to 60 days.  Longer periods may be available but will probably require higher fees.

Things that could affect your rate lock are:

• The appraised value comes in lower than what was expected in the sales contract.
• The borrowers' credit changes considerably before the closing.
• The loan amount changes after the rate lock.
• The loan type changes.
• The down payment decreases before the closing.
• Some income, like bonuses or overtime, could not be verified.

If a higher rate at closing means that you will no longer be able to qualify for the mortgage, it may be more important to lock in early.  Looking at what the rates have done for the preceding weeks may indicate a trend but at the same time, markets have turned overnight and started moving in the opposite direction.

A trusted mortgage professional can give you good advice and why they feel you should either lock the rate or let it ride.  Your real estate agent can help also but ultimately, the decision is yours.

Get the Buyer Incentives to Act Now

Sellers, who last year, were not willing to make any concessions, are much more likely to do so this year due to the softening of the market because of inflation and higher mortgage rates affecting affordability for buyers.

Concessions can take place in different forms.  A seller could offer to pay the buyer's closing costs or pay points for the buyer to get an FHA or VA loan.  Another option would be to pay for a 2/1 buydown that would lower the buyer's payments in the first two years of the mortgage.

Buydowns can be temporary or permanent and are achieved by pre-paying the interest at the time of closing.  Typically, the seller will do this as an inducement to the buyer.  While individual lenders set the price for permanent buydowns, a common rule-of-thumb would be two points, or two percent of the mortgage amount, to buydown the rate 0.5% for the life of the mortgage.

A more common type of buydown is a 2/1 where the payment is calculated at 2% lower than the note rate for the first year and 1% lower for the second year.  The third and following years, the payment would be calculated at the note rate.

$400,000 Purchase Price, 80% loan-to-value @6.27% for 30 years  Cost of buydown - $8,099
	1st year	2nd year	Remainder
Payment Rate	4.27%	5.27%	6.27%
P&I Payments	$1,775	$1,992	$2,221
Monthly Savings	$446	$229

 

In the example above, the seller would pre-pay the interest on the buyer's mortgage for the first two years to subsidize the difference in the note rate and the payment rate.

A 2/1 buydown is a fixed interest rate mortgage where the buyer must qualify at the note rate.  It is a standard, conforming loan and applies to FHA, VA, or conventional.  The benefit is that the buyer will have lower payments for the first two years which can help them settle into the home and not exhaust their resources initially.

Closing costs and pre-paid items are commonly included in seller-paid incentives for the buyer.  Many times, they are described in the listing and/or sales agreement as "Seller to pay up to $X,000 in closing costs or pre-paid items on behalf of the buyer."

The benefit to the buyer is that less money is needed to close the loan.  Lenders are agreeable to this type of provision if it is stated in the sales contract.

Car dealers have been providing incentives in the form of upgrades, below market interest rates, pre-paid regular service for a period, and other things to incentivize a buyer to purchase now.  It is also common practice for new home builders to do the same.

In the resale home market, while these things have been done in the past, there wasn't a need for sellers to incur the additional expenses with such a short supply of homes.  The market certainly changed in 2022 with fewer qualified buyers in the market due to the higher interest rates.  Now, sellers are starting to offer incentives but regardless, buyers can include the incentives in a sales contract for the seller to consider.

Your agent will be able to help you understand what things are common in your market to help with some of the concerns facing buyers today.

Compare Before Deciding on the Standard Deduction

The TCJA of 2019 dramatically increased the standard deduction so that many homeowners benefit from taking that rather than itemizing their deductions.  Taking the standard deduction may result in a larger deduction even if you have no expenses that qualify for claiming itemized deductions.

Another thing reinforcing taking the standard deduction was low rates at the time and the interest plus property taxes were less than the standard deduction.

In 2022, mortgage rates more than doubled, so, anyone who purchased a home or refinanced at the higher rates might benefit from itemizing rather than taking the standard deduction.  The takeaway in this article is to compare both methods each year to see which way provides the larger deduction.

For 2022, the standard deduction for married couples filing jointly is $25,900, for single filers and married individuals filing separately is $12,950, and for heads of households is $19,400.  There are increased amount for seniors over 65.

Mortgage interest, points paid to purchase a home (paid by seller or buyer), and property taxes are deductible on Schedule A.  Other items allowed as deductions are charitable contributions, medical expenses in excess of 7.5% of taxpayers' adjusted gross income, and casualty and theft losses from a federally declared disaster.

In 2019, IRS reported that 89.5% of people took the standard deduction which is easier to file, doesn't require receipts, and may yield a higher deduction than itemizing but the only way to be sure is to compare both ways.

For more information, download Publication 529 or contact your tax professional.  Download our Homeowners Tax Guide for more information on homeowner taxes.

Negotiate a Buydown to Get into a Home Now

If you are a prospective homebuyer, things have changed in the past year.  Most notably, mortgage rates have more than doubled which has created an affordability gap that has taken approximately 15 million buyers out of the market.

Inventories are growing but it isn't because more people are deciding to sell their homes; it is because it is taking longer to sell properties because less people are qualified.  Current housing inventory is a little more than a quarter of what it was in 2008.

Buyers are wondering when the market will return to normal, as if mortgage rates at three and four percent should be commonplace.  The average mortgage rate between April 1971 and November 2022 is 7.76%.

Predictions for mortgage rates in the third quarter 2023 range from 4.5% for Fannie Mae, 5.0% for Mortgage Bankers Association, and 5.2% for Freddie Mac.

Traditionally, over the past 35 years, there is a 175-200 basis point difference between the 10-year Treasury and the 30-year mortgage rates.  However, recently, the spread has been 300 basis points.  Some experts explain this to indicate that the Fed's tactics for lowering inflation is working and the mortgage market will soon respond which is indicated by lower rates in the past few weeks.

"The gap between the 30-year fixed mortgage rate and the government borrowing rate is much higher today than it has been historically," NAR Chief Economist Lawrence Yun, said. "If we didn't have this large gap, mortgage rates wouldn't be 7%, they would be 5.8%."

There is opportunity for prospective buyers in today's market.  The slowing of housing sales, down 34% from December 2021, have changed the environment buyers were experiencing in 2020 and 2021.  Instead of having to pay a premium over the list price, many sellers are willing to negotiate on price.

Without multiple offers being the normal, buyers can expect to include contingencies for financing, appraisal, inspections, and possibly, the sale of a home currently under contract.

Some buyers who are confident that mortgage rates will come down soon have opted to purchase now with an adjustable-rate mortgage.  This can lower the rate by about one percent for the first period which can be five years.  When mortgage rates returned to acceptable, the borrower could refinance to a fixed-rate mortgage.

Another option to consider would be to do a buydown on the mortgage rate.  Assuming that in the "softer" market, the seller would accept an offer to buydown the interest rate for the first two years.  It would allow the buyer to purchase at today's prices, with much lower payments for the first two years.

Example

$500,000 Purchase Price, 80% loan-to-value @6.13% for 30 years | Cost of buydown - $8,934
	1st year	2nd year	Remainder
Payment Rate	4.13%	5.13%	6.13%
P&I Payments	$1,940	$2,179	$2,432
Monthly Savings	$492	$253

 

This type of mortgage is a standard, conforming, fixed-rate loan where the buyer must qualify at the note rate.  The payment for the first year is 2% less than the note rate and for the second year is 1% less than the note rate.  The difference must be paid in advance at closing and in the case of this example, the seller paid it based on contract negotiations.

During this period of lower payments, if the rate comes down, they could refinance the property.  Let's further assume that the rates come down at the end of the first year.  If the property is refinanced before the pre-paid interest is owed, the lender is required to reimburse the borrower which could be applied toward the cost of refinancing.

When the mortgage rates do return to an acceptable rate, there may be considerable pent-up demand from the mortgage-ready buyers who were priced out of the market.  This could lead to another seller's market where high competition results in prices above list price and sellers not willing to accept contingencies.

Temporary rate buydowns have been available for decades.  Their main purpose is to help a borrower get into a home with lower payments initially.  In some cases, they need it because they depleted their cash reserves on the down payment; in other situations, maybe, they are upwardly mobile and expect to be making more income soon.

The reason lenders across the country are talking about them now is because they provide a reasonable and viable alternative to buying a home at today's prices without having the higher payment initially for the current rates.  It especially makes sense if you believe that rates are coming down soon.

Your real estate agent can give you more information about this and explain how you can negotiate with the seller to pay the fee to get this type of loan.  Call us at (956) 725-3838.