Mortgage Interest Rates- Float or Lock?
The lowest rate is the best, right?
The lowest rate certainly sounds best. But did you know the lowest rate doesn’t always mean the lowest cost?
Mortgage interest is just one component of the real cost of owning a home.
Interest rates are a reflection of expectations for inflation and the suplly demand equation for money. Rising rtes typically mean rising inflation too.
When inflation occurs the value of your home will typically rise. You can subtract that incrase in value from the interest you pay for a better gauge of the real cost of owning a home.
The opposite is true too. If rates are low and inflation is absent, valuses stagnate or even drop, potentially adding to your real cost.
In simple terms, a low rate and no appreciation can be more costly than a higher rate with appreciation. Recently, the markets have provided for both low rates AND rising prices. If you are ready to take advantage of conditions that may no last or just want to learn more, reach out using the contact information on this page.
LOCK OR FLOAT?
Each option Can have its pros and Cons
Should you “lock in” or “float” the interest rate? All loans are lock in in at some point prior to closing, but should you do it earlier or later? Consider the following points to help you decide.
Locking in sets or locks the interest rate of your loan for a specific number of days. Typical locks run in 15 day increments up to 60 or 60 days maximums. Once set, its important for your loan to close within that period and hence, locking is safe only if you are sure of the closing date.
Floating is the opposite of locking in and simply means your rate is not yet set. It’s “floating” with the market. If rates are moving down, you can benefit. If rates are moving up, your rate will too.
Which is best? Unfortunately, “best” can be defined only after the fact. If you float your rate until the last moment and rates fall, you win. If rates rise unexpectedly, you have a higher rate and payment. No one knows for sure which way rates will fo. Often, “best” is better determined by your peace of mind. If you will sleep better at night by locking, go ahead. If you are comfortable with some strategic risk and think rates will fall, then float.
Still undecided? It may help to realize that very few people ever lock at the perfect time. The market is always moving, and there are just too many influences that cannot be predicted. It’s also good to know that once your loan has closed, its usually easy to refinance if rates end up moving lower. If rates rise, then you can be comfortable in knowing that you secured your rate at the right time.
Lots of interest, Little Principal
Why do I pay so much interest in the early years of a mortgage loan?
The interest owed starts to accrue from the day the loan is made. When you deposit money at the bank, you naturally expect to start earning interest on the balance right away. It’s exactly the same for lenders; they expect to earn interest on the balance as soon as they make a loan.
Interst diminishes along with the loan balance. On a typical loan, you pay principal each month, which reduces the loan balance and interested owed.
You enjoy a fixed payment. For a fixed rate loan. Payments are calculated to remain the same throughout the loan term. As the amount you owe in interest each month declines, you are able to pay more toward principal with the same payment amount.
Motgages remin affordable. Paying interest owed plus a small amount of principal each month in the early years of a loan contributes to affordability. If the amounts of principal and interest were equal from the beginning, the payment woule be substantially higher and fewer people would qualify.
Can I tip the scales?
Almost every loan allows yo to pay extra principal with your monthly payment. While paying extra wil l not reduce further months fixed payments, it will reduce the term of your loan. If you sell or refinance before the full loan term – which most borrowers do- you will have more equity in you home than you would otherwise. You can also reduce interest payment b using a shorter term loan, such as a 20 year rather than a 30-year.