I came across a flyer today from loanDepot advertising a 150-day rate lock for borrowers interested in today’s mortgage rates, who are worried (like everyone else) that they’ll be a lot higher later this year.
It’s not unusual for mortgage lenders to offer 60- or 90-day rate locks for those just beginning the loan process, but a full five months is certainly noteworthy.
It’s also a testament to the current fear and panic in the mortgage market, with just about everyone believing it’s a sure thing that mortgage rates will go up from here.
As it stands, they’re already significantly higher than they were at the end of 2017. The 30-year fixed could be had for around 4% in December, but is now closer to 4.5%.
On a $400,000 loan amount, we’re talking about a difference of roughly $120 per month. It shouldn’t necessarily sway someone’s decision to rent or buy, but it’s still one more negative to contend with seeing that home prices are lofty themselves.
You Can Lock Before You Find a Home
What makes this offer even more compelling is the fact that you can lock your rate before you actually find your dream home.
Yep, no purchase contract is necessary to get today’s rate written in stone. And to make the deal even sweeter for prospective home buyers, loanDepot is tacking on a float-down option.
If rates happen to go down, loanDepot will allow the borrower to take the lower rate 30 days prior to the close of escrow. Of course, this option typically comes at a cost, or you may only get a rate that is slightly above market.
Oh, and a rate lock for 150 days will cost the borrower more than a 30- or 60-day lock for the simple fact that the lender is taking on more uncertainty over a longer period of time. This is the same reason why a 5/1 ARM mortgage rate is cheaper than a 30-year fixed rate.
The other hitch is that the extended lock requires a deposit equal to .50% of the loan amount, which will be credited at closing if the buyer finds a home and closes on it. If they don’t, the fee isn’t reimbursed.
This seems to be an offer being pitched via the home builder channel for new homes, though it might also be offered via other channels. For the record, they’re offering a 120-day lock as well.
It’s Kind of Like a CD
While most rate locks tend to be 15-45 days, it’s not totally unusual to see longer rate lock periods. It’s just that most people don’t take advantage of them unless they have really clear longer-term plans and must have a certain rate.
And that’s if they’re advantageous to begin with. Ultimately, you’re attempting to predict the future, which we all know isn’t very easy.
It kind of reminds me of the Certificate of Deposit (CD) offers I’ve been receiving lately. They promise a higher-than-market APY for the next 12 months. The trade-off is a penalty if I need to withdraw my money early for any reason. The win is a higher rate of interest if savings rates don’t go up during that time and I don’t need to access my money.
Either way, it means my decision is already made if I go with the offer. For all I know, a different bank might offer something even better, or my existing bank may continue to raise the savings rate in the meantime.
When it comes to mortgage rates, it’s anyone’s guess what will happen over the next five months and beyond.
My 2018 mortgage rate forecast predicts the 30-year fixed being anywhere from 4.2% to 4.8% by the end of the year. That means it has the potential to fall over the next few months as well.
I know I’m being a contrarian by even suggesting that mortgage rates could improve short-term, but I’m always skeptical when everyone else is so sure of something.