I’ll cover interest rates again today as I haven’t done that for a while. The lowest mortgage rates are offered by Fannie Mae for prime borrowers.
At the beginning of this year all the smartest guys in the room agreed interest rates would rise steadily over the course of the year, and end up around 5% or so for a 30-year fixed-rate mortgage. Not being one of the smartest guys in the room, I simply listen to the smartest guys and nod my head in agreement as a general practice.
As it turns out, we were all as wrong as we could be. Rates have barely budged all year, and have actually improved slightly. Last week there was a little improvement due to the unrest in Hong Kong, but it lasted only a day or two. Rates came back up Friday, but the change was slight, as it has been all year.
But here is the important point I’d like to make in this post: even slight changes can make a difference of thousands of present-day dollars. How so? To best understand this concept, you must pay attention to the cost of the loan on any given day, rather than the interest rate. Let me explain.
I’m currently re-pricing every day for a client who hasn’t locked yet. On Friday, September 26th, at a specific interest rate his loan would have cost him $2,104 in total closing costs.
On Tuesday, September 30th the credit offered by the lender at that interest rate improved, and the same interest rate would have cost him $1,752. In other words, slight improvements in the mortgage market reduced his cost by $352 at the same interest rate.
On Thursday, October 2nd (when media coverage of the unrest was heaviest) the same interest rate would have cost him $0.00. (The credit from the lender for that interest rate was large enough to cover all of his closing costs.) In other words, at the same interest rate his up-front costs went down from $2,104 to -0- in a span of six days.
Before you say “Hey, there’s no such thing as a no-cost mortgage!” yes, you are correct. On the day that his cost would have been -0- for the interest rate in question because the credit from the lender improved. Alternatively, he could have chosen to reduce his interest rate by 0.125% instead and still paid costs.
But by using a single interest rate as a benchmark, you can see that up-front costs can vary dramatically based on what day you lock. Could you find other useful things to do with $2,104 if you didn’t have to spend it on closing costs, all things being equal? I know I could.
Locking strategy is the single hardest concept to communicate to clients, in my experience, and yet it is an area where a competent mortgage advisor can make arguably the greatest difference in the lifetime cost of your mortgage financing.
As you can see, then, it’s important. I believe I have figured out a way to demonstrate it – I’m working on that post for later this week.
Today rates are higher than they were last Thursday, but they are improving slightly in the early going. If you’d like to know more about locking strategy, watch this space for further information, or call.