Locking in a rate

[Longhorn_Fan68]

In a similar thread to the one below - when should on lock in a rate? When we got prequalified (FHA) we were prequalified at 5.5%. As of late last week we had jumped to 6.5%. Our loan officer just emailed us and said he could lock us in at 6%. The difference between 5.5% and 6.5% is $200 a month in our mortgage, so it makes a difference. Any financial gurus out there want to weigh in? Thanks!

 

[HornBud]

Are you sure the loan officer isn't just trying to scoop .5%? From a sales perspective, it would seem a perfect set up to scare you, then "save" you if you hurry up and sign right away.

 

[Bernard]

When did they tell you 5.5%?
When did they tell you 6.5% or 6.0%
When does the offered rate lock expire? 30 days? 60 days? longer?
When do you plan on closing your house?
Is there a deposit required to lock the rate?
Is there a cost if you break the lock (if rates fall after locking)?

The 10-year Treasury yield has been going up over the past few weeks and months. As of yesterday, yields were down 25 basis points from the recent highs. The yield was down another 10 basis points today. This will affect your rate.

Treasury yields are the base rate for pricing mortgages. The lender then adds a spread on top of the base rate. The base rate and the spread fluctuate. Treasuries are traded on the open market and their yields move by the hour, even by the minute. Lenders change spreads based on a number of different market factors that can change day by day.

It sounds fishy that a loan originator can tell you that the rate is really 6.5%, but somehow he can get you 6.0%.

Start asking him questions like these:
1. How exactly is the interest rate being calculated?
2. What is the index? ---- Probably the 10-year UST, which you can track for yourself every day.
3. What is the spread? For this you'll have to rely on him. Note however, that this is the real key to your mortgage. Comparing spreads is the real way to make an apples to apples comparison of competing mortgage quotes. 99.99% of people who have ever bought a home do not have a clue about this.

How's your credit?
How much do you have for a down payment?
How much house are you trying to buy relative to your income?

Bernard

 

[ninerhorn]

I have been quoting 5.875% on an FHA.

The markets are seeing swings causing violent rate movements, sometimes multiple times a day.

feel free to email me with any questions, I am happy to help a fellow Horn get a good deal.


[email protected]


good luck

 

[WhoseHouse]

Bernard-
Can you explain more about what you mean by "spread"?

 

[Holden]

I think the spread is the difference between your actual rate and what the lender is "up-charging" you the borrower. 5.5% is actual, lender says your rate is 6%. Spread is .5%. This is a kickback and, therefore, why you'll have to rely on your lender to tell you what the spread is - you can see why he would not want to.

 

[Bernard]

Index Rate + Spread = Interest Rate on Your Loan

All mortgages are priced based on a "spread" over some other index, usually US Treasuries. Right this minute, I can buy a 10-year US Treasury bond and obtain a yield (sort of like and interest rate) of 3.61%.

As a rational investor, I certainly wouldn't invest in a mortgage bond if that bond also yielded 3.61%. US Treasuries are considered risk free. Mortgages are not. With a Treasury bond, I am guaranteed by the US government to get my 3.61% yield for the life of the bond and a return of the face value when the bond matures. If I buy a mortgage bond instead, there is some risk that the borrower will default on the loan and not only will I not get my 3.61% interest, I might not even receive the full face value of the bond. The only thing backing up a mortgage bond is a pool of mortgages (and maybe a guarantee from Fannie or Freddie), not a guarantee from Uncle Sam.

The "spread" is the premium that the mortgage company adds to the index rate to calculate the actual interest rate on the loan. The spread actually has two components, but for you purposes, they are largely irrelevant.

If a mortgage lender won't tell you the spread, you can approximate it yourself. If your lender is offering to lock your 30-year mortgage at 6.00% right this very minute, you can subtract the current 10-year Treasury yield of 3.61% and determine that the spread is 2.39%, also referred to as 239 basis points.

Now you have some real data to help you track interest rates.

Today's UST yield of 3.61% is 13 basis points lower than yesterday's market closing yield of 3.74%. Yesterday's yield of 3.74% was 10 basis points lower than Monday's end of day yield of 3.84%. As these Treasury rates fall, there should be a corresponding drop in the interest rate on your loan. The index rate has dropped, but the spread stayed the same, so your interest rate should be lower.

Spreads can change too, however, which complicates the analysis. Spreads change for a variety of factors, but they are somewhat different than the factors that cause Treasury yields to fluctuate.

The spread, not the index, is how the lender makes their profit. They want to have enough of a spread on your loan so they can package it up with other loans and sell them for a profit.

Each lender sets their own spreads. Lenders has no control over the index.

If you are getting quotes from two or more lenders on the same day and the same time, you can ignore the spread and just look at the overall rate. But if you're getting a quotes on different days, you need to know the spread. As stated above, the UST yield is down almost 25 basis points in the last two days. A quote received on Monday and quote received today are apples and oranges.

Also, if you've already chosen a lender, it's very important to know how his rate is calculated (even though almost no one does). MANY a lender has many a dollar in a falling rate market by simply not informing their borrower that the index rate has dropped. They deliver the same interest rate as they originally quoted, but in reality the spread has widened and so has their profit.

Bernard

 

[kmac30]

wow. not in the market right now, but that is a lot of great info. thanks for explaining in pretty deep detail.

 

[Smurfette]

Thanks, Bernard.

 

[Longhorn_Fan68]

Well, our close is being pushed back a little bit and our rate (6%) is about to expire. So now my lender is telling me that either I will have to go with prevailing rates when we lock again or if the rate at that time is lower than 6%, the lowest rate we will qualify for is 6%. Is this correct? I'm kinda miffed about this. I will most likely now have to start the whole process over again if I want to take advantage of a lower rate that comes along.

 

[Bernard]

First, why is the closing being pushed back? Is there any way to close on time and preserve your rate lock? Don't let others dictate your time table. You are the buyer. You're the only one bringing money to the table. You should be making the rules.

Second, I don't really understand what you mean by this:

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[Longhorn_Fan68]

Bernard, I will spare you the details as to why we are delaying but suffice to say it is not coming from the outside. There are some details about our deal that still need to be ironed out.

Basically now we're trying to decide to stay with the lender we've been working with or decide to shop around. Any thoughts?

 

[Bernard]

You should always be shopping around. Don't put all your eggs in one basket. Even if your not shopping around in earnest, make a couple preliminary phone calls and see what other loan sources have to say.

Even if you're too lazy to call another source, whenever you talk to the guy, say things like, "That rate seems high to me" and "I've been getting calls from other lenders and they are telling me they can beat your price". Be vague. Don't get into some quote matching situation. Just tell he "really needs to put his best foot forward".

Remember when I said above:

In reply to:

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[Longhorn_Fan68]

hopefully, not more than a month or so. worst case - 2-3 months. The owner is trying to work a deal where we can move in and pay rent until all the other hang-ups are taken care of.