When to ‘Float’ Your Interest Rate

As a mortgage broker my responsibility to you begins at our first contact, continues through the process and does not end until the house you have chosen is officially yours. I stay involved throughout the entire proceeding, watching the market and advising you to the very best of my ability.
 
When you begin working with a lender and go through the pre-qualification for either a refinance or a purchase, you have the ability – once your loan is approved – to lock that interest rate. The question is always when to lock the rate. No one can answer that with total assurance. It is always possible that, after you have locked your rate, rates may decline which means you locked too early. But maybe just the opposite happens: you choose not to lock your rate and in the next day or so the rates go up and it is a quarter percent more. You cannot go back to the better rate.
 
In order for my clients to make the best decision, I ask them to allow me to be in the driver’s seat on when to lock the rate. I watch the bond market for a curve and when I begin to see a curve develop – either one way or the other – I am able to ascertain whether or not to lock or wait for a better market. Sometimes when the market is very volatile I may choose to lock the rate on a 30 or 45 day lock as soon as a closing date has been set. Loans may also be locked for 60 days and some lenders will even allow us to lock 90 days out. When you are purchasing a property, lenders will not allow you to lock unless you are locking on to an address. In other words, they do not want you to lock a great low interest rate for 90 days and then go out shopping for homes. Their fear is that at the end of 90 days you have either not found the property you want to buy or have decided not to buy at all and cancelled the lock. This means they have taken the amount of your loan off their available line and have not been able to do another transaction with that money. If they are going to lock a loan, they would like the assurance that you intend to close on that loan.
 
My company does not charge to lock an interest rate but I know that several of my competitors do so.  If they locked you into a loan rate, the rates improved and their company did not have the capability to do a float down, they need the money from you to hold you to that loan so you will stay with them. The reasons I do not charge are 1) I want to work with people who want to work with me and 2) I know that the lenders I work with have float down availability. A float down works this way: If we lock an interest rate – let’s say we lock at 5.5% and the market betters to 5.375%. The lender is not going to initiate a float down for you because they are looking at their rate of return and their profit margin. What the lender likes to see is that their profit margin stays the same or improves in a float down environment.
 
The other day I was able to obtain a float down for a client whose rate went from 5.5% to 5%. Unfortunately, this is not something I can do with email so it involved almost an hour on the phone with the lender. The good news is that it did not cost my client a penny but will ultimately save him over $15,000 over the life of his loan. Another friend had a slightly larger loan and I was able to save him over $20,000 over the life of his loan.
 
So there are two things to ask your lender when you are locking your loan.
1.      Are they going to charge you for locking the loan and
2.      Do they have the ability to float it down if the market improves
 
A surprising thing about this business is that it has turned me into a geek – a word I never thought would be applied to me! I spend long hours at my computer reading analyst reports, treasury reports, bond trading information, speculators talk, future earning reports, housing starts, unemployment numbers, LIBOR. But all the time spent enables me to watch for those curves and predict where to place my clients as their closing dates approach. The other day we had a great interest rate for a client – 5.25% – an awesome rate. But the market turned and I was able to float him down to 5%. He did not have to do a thing. And, sure enough, after I did that float down for him and a few other clients I had locked in the pipeline the interest rates began rising. Remember, interest rates move by how the bond and stock markets are doing so I watched the bonds selling off very aggressively one day and I called to initiate the float downs for my clients. The next day interest rates were up by 1/8 to even ¼% on certain programs.
 
So remember those two questions to ask your lender when you are considering a lock:
1.  Are they going to charge you for locking the loan and
2. Do they have the ability to float it down if the market improves
 
You might also ask a third question: Is their lender willing to take the time on the phone to initiate a float down when the market improves?
 
That’s it for now. Thanks for reading!

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