Homeowner Education Center

Deciding Whether to Lock in Your Mortgage Rate? Here’s What You Need to Know

“Should I lock in my mortgage rate now or wait?” It’s the question on every homebuyer’s mind. While we all wish for a crystal ball to give us the answers, the truth is, there’s no one-size-fits-all solution. But, don’t worry, I’ve got some insights to help guide your decision.  Float simply means you have not locked in your interest rate and the rate or the points will continue to fluctuate daily with the market.  Locking means you have locked in the interest rate and points.  

Be aware:  Just because you have asked your lender to lock in the interest rate doesn’t mean you ‘ll be approved.  Depending on your credit score, or numerous other factors, the final rate and points could vary. If you are denied approval for that loan program and you are approved for a different loan program that lock won’t be valid on the new program.  In short, unless you have full loan approval just because you are locked,  the final rate and points could change.

First Up: If You Want a Sure Thing…

If you’re looking for a straightforward answer, and you’d rather not gamble on what rates will do next, then locking in your rate is the way to go. It’s like choosing a fixed price for your gas for the next ten years, regardless of whether prices go up or down. 

But, If You’re Feeling a Bit More Adventurous…

Accepting that no one has a crystal ball can be liberating. You might think experts have the inside scoop, but in reality, predicting market movements is as much a gamble for them as it is for you. Even though it might seem like there’s a method to the madness, market predictions have proven to be a hit or miss.

The Catch with Predictions

Because everyone consumes information differently, we tread lightly with our predictions. You’ll rarely see us lean too heavily one way without mentioning other possibilities. It’s not about telling you what will happen; it’s about giving you the knowledge to make your own informed decisions. Think of it as learning to fish instead of being given a fish.

Considering Locking Your Rate? Think About This…

Many folks lean towards waiting for rates to drop before they lock in, attracted by the potential savings. But, there’s a pattern among the pros: the more they understand the market, the more they tend to lock in rates early.  This doesn’t mean one strategy is universally better; it’s about managing risk and personal preference.

When Floating Could Work in Your Favor

• If you’re planning to lock in your rate by the end of the day based on market alerts.
• When you need to qualify for a loan at current rates or if a short-term rate drop is predicted.
• If you’re aiming for a lower rate and are prepared to lock in if rates worsen throughout the day.

When It’s a Gamble to Float

• Betting on market trends without solid evidence.
• If you closing date may be delayed (especially for new builds). When a lock expires you are usually subject to the worst case of the locked rate or the current rates–whichever is higher.
• Hoping for rates to drop because they’ve been high recently, or vice versa.  When rates are increasing sometimes they just keep increasing!

Solid Reasons to Lock In

• You’ve been floating and rates have improved, so now might be a good time to lock in those gains.
• If rates drop suddenly and lenders start to increase rates for other reasons, it might be wise to lock in before things change.

A Reality Check on Predicting the Future

Day-to-day, predicting mortgage rates is a gamble. Historical trends suggest that trying to outsmart the market often doesn’t end well. Remember, if it seems obvious to you, others have likely already acted on it.  Keep in mind, that if you could predict rates you would make millions of dollars a year as a bond trader!

So, What’s Next?

If you’re tempted to test your theories without risking real money, go for it! Keep a record and see how you do over a few months. If you find a winning strategy, keep it to yourself and maybe consider a career in hedge funds. Otherwise, understand that it’s often a 50/50 chance, and make your lock or float decision with that in mind.

When you’re in the market to buy a home, understanding mortgage interest rates is crucial. One of the key factors that influence these rates is the yield on the US 10-Year Treasury Bill (T-Bill). But how exactly does this relationship work, and why should you, as a potential homebuyer, care? Let’s break it down.

What is the US 10-Year Treasury Bill?

The US 10-Year Treasury Bill is a government debt security that matures in ten years. When you buy a T-Bill, you’re essentially lending money to the US government, which in return pays you interest. The yield on the 10-Year T-Bill is considered a benchmark for long-term interest rates, including mortgage rates.

The Connection Between 10-Year T-Bill Yields and Mortgage Rates

Mortgage interest rates, particularly for 30-year fixed-rate mortgages, often move in tandem with the yield on the 10-Year T-Bill. Here’s why:

1. Investor Behavior: Mortgage-backed securities (MBS) are investments that fund most fixed-rate mortgages. Investors consider these securities as safe investments, much like T-Bills. When the yield on T-Bills rises, MBS must offer higher returns to attract investors, leading to higher mortgage rates.
2. Economic Indicators: The 10-Year T-Bill yield is a reflection of investor sentiment about the economy. When the economy is strong, investors expect higher inflation and interest rates, leading to higher T-Bill yields and, consequently, higher mortgage rates. Conversely, during economic downturns, yields typically fall, pulling mortgage rates down with them.
3. Market Expectations: The Federal Reserve’s policies also influence the 10-Year T-Bill yield. When the Fed raises short-term interest rates to combat inflation, it signals that long-term rates (including the 10-Year T-Bill) may rise. Mortgage rates adjust accordingly to reflect these expectations.

Why This Matters to Homebuyers

As a prospective homebuyer, understanding the relationship between the 10-Year T-Bill yield and mortgage rates can help you make informed decisions. Here are some key takeaways:

• Rate Predictions: By monitoring the 10-Year T-Bill yield, you can get a sense of where mortgage rates might be headed. A rising yield generally indicates that mortgage rates could increase, prompting you to lock in a rate sooner rather than later.
• Economic Insights: Changes in the 10-Year T-Bill yield can also provide insights into the broader economy. For instance, falling yields might suggest economic uncertainty, which could influence your timing and strategy in purchasing a home.
• Financial Planning: Understanding these dynamics allows you to better plan your finances. For example, if you anticipate rising rates, you might opt for a fixed-rate mortgage to lock in a lower rate.

Conclusion

The yield on the US 10-Year Treasury Bill is a significant indicator for mortgage interest rates. By keeping an eye on T-Bill yields, you can gain valuable insights into mortgage rate trends and the overall economic environment. This knowledge can empower you to make more strategic decisions as you navigate the home buying process, ensuring that you secure the best possible mortgage terms for your new home.

Remember, while the 10-Year T-Bill yield is a key factor, it’s just one piece of the puzzle. Always consider consulting with a mortgage professional to understand all the factors that might affect your specific situation. Happy house hunting!

Understanding CPI and Its Impact on Mortgage Interest Rates for Homebuyers

If you’re in the market to buy a home, you’ve likely come across the term “CPI” and heard how it can affect mortgage interest rates. But what exactly is CPI, and why does it matter to you as a homebuyer? Let’s break it down into simple terms.

What Is CPI?

CPI stands for the Consumer Price Index. Think of it as a thermometer measuring the health of the economy by tracking the cost of a basket of goods and services that typical consumers buy, such as groceries, clothes, and medical services. The CPI report, released monthly by the Bureau of Labor Statistics, shows whether this basket’s cost has gone up or down, essentially measuring inflation or deflation.

Why Is CPI Important for Homebuyers?

The CPI is a crucial indicator for both the economy’s health and the direction of mortgage interest rates. Here’s why:

• Inflation Indicator: A rising CPI means inflation is occurring, indicating that prices for goods and services are increasing. This can lead to higher living costs and affect your buying power. 
• Interest Rate Decisions: The Federal Reserve, which sets the baseline for interest rates in the U.S., closely watches CPI data. If the CPI is high, the Fed might raise interest rates to cool off the economy by making borrowing more expensive. Conversely, if the CPI is low, indicating deflation or economic slowdown, the Fed might lower interest rates to encourage spending and investment.
  
  (As explained in our other articles, the Federal Reserve doesn’t directly set mortgage rates, but they have a lot of influence over the direction of mortgage rates.)

The CPI-Mortgage Rate Connection

Mortgage rates don’t directly follow the CPI, but they are influenced by the actions the Federal Reserve takes in response to CPI data. Here’s how:

• High CPI = Potential Rate Hikes: When CPI reports indicate inflation is rising, it signals the Fed might increase interest rates to keep the economy from overheating. Higher interest rates mean higher mortgage rates, as lenders need to make borrowing costlier to slow down inflation.
• Low CPI = Potential Rate Cuts: If the CPI shows that prices are stable or falling, it might lead to the Fed lowering interest rates to stimulate economic growth. Lower federal interest rates can lead to lower mortgage rates, making borrowing cheaper and potentially boosting the housing market.

What Does This Mean for You?

As a homebuyer, understanding CPI and its impact on mortgage rates can help you make informed decisions:

• Timing: If CPI data indicates rising inflation and potential interest rate increases, you might decide to lock in a mortgage rate sooner rather than later to avoid higher rates.
• Budgeting: Knowing that CPI affects living costs and potential mortgage rates can help you plan your budget more effectively, ensuring you’re prepared for future expenses.
• Market Insight: Keeping an eye on CPI trends can give you a sense of the broader economic landscape, helping you gauge the best times to buy or wait.

Final Thoughts

While CPI is just one of many factors affecting mortgage rates, it’s a critical one that provides valuable insights into economic trends. By understanding CPI, you can better anticipate changes in mortgage rates and plan your home purchase with more confidence. Remember, a well-informed homebuyer is a smart homebuyer.

When you’re looking into getting a mortgage, you’ll likely come across the term APR, or Annual Percentage Rate. Think of APR as the true cost of borrowing money for your home, which usually ends up being more than just the interest rate your lender talks about.

Here’s the thing, though: calculating APR involves a mix of upfront costs and a bit of human guesswork. Because of this, it’s not a perfect measure. Just because one lender offers a slightly lower APR doesn’t automatically mean you’re getting a better deal.

Let’s dive into something called “prepaid finance charges” (PFCs). These are basically fees you pay upfront to get your mortgage, not for any actual service like homeowners insurance (which you’d pay for regardless of a mortgage). Whether it’s a fee for processing your loan or something else, these PFCs are a big part of figuring out your APR.

Whether a loan has a lot of these charges or just a few isn’t necessarily good or bad. Sometimes, lenders might offer you a higher interest rate to cover these fees, meaning you don’t pay them upfront but over the life of your loan instead. This choice boils down to paying more now or more later.

The reason APR is important is because lenders have to tell you what it is by law, aiming to show the real cost of your loan. Sounds helpful, right? Well, it’s a bit more complicated because lenders calculate APR in their own ways. While most follow similar methods, some might tweak the numbers to make their APR look more appealing. Some lenders might also play it safe with what they count as a PFC to avoid getting in trouble with regulators, which can make their APR seem higher even if the upfront costs are the same.

You might see a lower APR, but because it has a lot of upfront fees it could be a bad option for you if you plan to sell the home, or refinance, in a few years.  That’s because the APR is calculated over the whole term of the loan, but not many people actually keep the home or the loan for thirty years! 

When comparing APRs make sure you are comparing the same type of loan. Don’t compare the APR for a 30 year fixed rate mortgage against and APR for an adjustable rate mortgage.

So, here’s the takeaway: Don’t just take an APR at face value. To really see which mortgage offer is better, you’ll need to compare the nitty-gritty details of those upfront costs. It’s a bit of a hassle, but it’s the best way to make sure you’re truly getting the best deal on your mortgage.

 

You want the lowest payment on your mortgage, right?  So what is a mortgage rate exactly and who determines it?

Here’s a simple way to understand it:

A mortgage is a loan that you promise to repay.  And it’s secured by your house…so if you don’t pay it back the lender gets to take the house.  That makes it a pretty safe loan for the lender. In the lending world, safe usually means a lower interest rate.

While you might get a small loan from a credit union and pay that credit union back directly, mortgages are usually pretty large (especially with house prices today) so most mortgages eventually get bundled together with other similar mortgages and big investors buy them.  A bunch of mortgage loans pooled together is usually sold as a mortgage backed security.

That’s not super important for you to understand, except for one thing…the market determines the interest rates, not your loan officer, underwriter or even the president of the mortgage company.

In the past thirty years rates have been over 10% and as low as around 3%.  But none of that matters, because the interest rate today is determined by the market.  

The market is simply what investors are collectively willing to lend money at.  Investors want the best risk adjusted return on their money.  Investors can do lots of things with their money such as buy US government bonds, invest in mortgage backed securities, or lend money to companies (not to mention investing in stocks, etc).   Since a US government bond is considered the safest, that usually has the lowest interest rate.  A mortgage to someone with perfect credit and a big down payment would be safer than a mortgage to someone that had a recent bankruptcy and a small down payment.  A loan to Apple would be safer than a loan to a small company that isn’t profitable.

Since mortgage rates are usually considered pretty safe, but not as safe as a US government bond, mortgage rates will usually be higher than than a US government bond, but track pretty closely. 

Since a 30 year fixed rate mortgage usually ends up getting paid off in around 10 years, mortgage rates are usually pretty correlated to the 10 year US treasury notes.

The federal reserve doesn’t control mortgage rates, but since they control the federal funds rate essentially the prime rate they indirectly control mortgage rates, because those investors just want the best and safest return.  If the Federal Reserve raises rates in other areas mortgage rates will usually follow up up0, or if teh Federal Reserve is lowering other rates then mortgage rates will usually trend down.

The biggest impact on mortgage rates is inflation.  Each week different economic reports are released. These reports influence the Federal Reserve’s actions and ultimately teh Federal Reserve is trying to keep the economy growing at a moderate pace with a little bit, but not too much inflation.  We have another article on inflation, but the bottom line is that high inflation equals higher rates. Low inflation means lower rates.  Bad economic news is usually good for interest rates (careful what you wish for…a low mortgage rate won’t help much if you’re unemployed).