By Douglas Katz – 06/23/2022
Mortgage rates have been at the height of discussion and media coverage lately. After a long period of the lowest rates in recorded mortgage history. rates have spiked. This freaked out buyers, killed all refinances and generally created a mild panic. What is interesting, however, is that many prospective buyers and homeowners fail to do the “so what” analysis with rates and fail to consider what an increase, or even a decrease, would mean from a practical perspective. That is not to say that the recent unprecedented pace that we have seen the recent mortgage rate increases. Any time that rates move several points in as many months there is a profound impact. I am more addressing the minor ups and downs that we see in a normal market.
Before the deep dive, I want to recount a typical conversation with an applicant.
- Me: “Based on where the market is now, I can get you a rate of x% for the program that you have chosen.”
- Client: “Is that the best that you can do? I was really hoping for a quarter point lower.”
- Me: “We always quote our best rates out of the gate, so yes, that is the best rate that I can deliver.”
- Client: “OK. That’s fair, but I think that I will wait for them to go back down again before locking.”
- Me: “That is fine but remember a drop is not guaranteed and we should talk about what a minor difference means in your actual payment.”
That last part is the most important, but you would be amazed at how often it is not only not considered but how many borrowers get rate myopia and focus on rate above anything else. Again, I am not saying that rate is not important, but when you have a unwavering focus on trying to time the lowest rate possible for your transaction, you may fail, but end up with the opposite outcome.
So what does a rate move really mean then?
Here is an example:
- Loan Amount: $200,000
- Payment at 6% – $1,199.00
- Payment at 6.125% – $1,215.oo
- Difference – $16 – So, the difference is under $20 for this example.
So, the hand wringing and stress is over less than a fast food meal causes clients to make decisions that can actually cost them if rates do not go the way that they expect. Not to say that anyone should not actively strive to maximize the use of every cent that they have, but there is an old saying about stepping over a dollar to save a dime. This is that case.
I cannot tell you how many people lost out on the opportunity to save hundreds in an effort to save hundreds plus a few bucks. You would be blown away that there was anyone in the population of homeowners who missed the lowest rates that we could see in a lifetime because they were waiting for them to go back down. This includes those people who could have done projects or consolidated high interest variable debt, such as credit cards, and massively improved there overall financial picture. All because of single focus rate myopia. No matter how many times that I tell applicants that rates will go up more sharply and faster then when they go down.
So what should a prospective borrower do regarding rate:
- Understand long-term and short-term rate forecasts – If you want to fully understand locks, check out my recent article about them. The gist that you will have to decide to lock a rate at some point and the rate itself is part of that, but the length of time until you need to close matters. Locking a rate for a longer period of time will usually be more expensive and you need to look at rates in the context of your planning timeline. Typically, the shorter the period, the more you should be incented to lock. The longer that you have from application to close, the more flexibility that you have to float and wait for an improvement. There are a ton of tools to see the different forecasts and your lender can help.
- Understand the impact of a rate increase or decrease on your scenario – You NEED to run the numbers for a lock decision with anywhere between 0.125% and 0.25% in either direction. When you only see rate, you are more likely miss opportunity to secure a good rate. Your chances of timing even the short term bottom in a rate cycle are slim. If everything is pointing to a drop, it does sometimes make sense to wait, but there are risks. When faced with the lock choice, do your homework. You may find the change that you are stressing over is a nothing burger. I also highly recommend determining your inflection point for when a rate will be too high and working with that for your analysis. Even if it is a point above current rates, rates can spike like they have recently and this gives you a good upper bracket to make an informed decision.
- Look at your payment in the context of your overall financial picture and plan – This is the big one, so I wanted to save it for last. The rate is important, but your payment and that payment in conjunction with other financial requirements and needs is what is important. If you are questions the need for a budget, check out my recent article. Even if you know that you need one, have you made one? For many the answer is no. That is staggering when you think about that a rate is part of financing what is likely your most expensive asset. Especially if a small increase in payment will blow your personal budget, you need to know the whole picture.
- Take any required timelines, like divorce, into account – I already referenced the timeline based on the contract, but what about other timelines. As a Certified Divorce Lending Professional and Divorce Housing Pro, I deal with a lot of divorcing clients. Most if not all of the time, any disposition of the home needs to occur by a mutually agreed upon date. The rate is more important under these circumstances than under typical deals as borrowers are entering into an entirely new life and budget. More often than not, the new life will have a very different financial picture, at least in the short-term. Waiting for that better rate when you can qualify at the market rate can be disastrous if that higher rate kills the deal. To see some of the ways that can happen, I highly encourage you to read my article on considerations for divorcing couples because they are often disregarded.
So, yes rate is important, but when really analyzed, you may be surprised at not only the actual impact but also that you may be doing an incomplete analysis. By all means learn everything that you can strive for a rate that puts you in the best position possible, but do not do not let it blind you. Rates do matter but much less than you think and, if the rate matters that much, you may be overextending yourself.