 Personal Finance PowerPoint Presentation. Should I lock my mortgage rate today? Get ready to get financially fit by practicing personal finance. Remember that we can break our finance decisions down into the short term decisions, the long term decisions, the short term decisions being the ones where we're going to train our gut to trust our gut honing down our habits so we can depend on our habits to make those decisions. The long term decisions on the other hand, we don't have the benefit of trial and error, the ability to tinker and therefore we use the adage of measure twice. Cut once, clearly the home purchasing process falls into that category, so we want a more formal structure for the decision making process, which could include these sections that we can break the home purchase process into. Number one, determine home ownership need. Number two, find and evaluate property to purchase. Number three, price the property. Number four, obtain financing. Number five, close the purchase transaction. Should I lock my mortgage rate today? Most of this information can be found on a Vestopedia, which you can look up online and take a look at the references and resources continuing your research from there. This is by Ray Houtley Beck, published March 25, 2022. Deciding when to lock your mortgage rate may be one of the most expensive decisions of your life. So clearly when we're talking about a home purchase process, normally we can't put the cash down up front because we don't have all the cash down up front, and therefore we're going to need some form of financing. Obviously when we get into the financing, we have to pay what I would call the rent on the money, which is interest, so we have to deal with the interest that is going to be involved. Clearly that's a long-term kind of decision when we're financing a home. I would think about that first to think about this baseline standard loan if you had all the boxes checked and you're going through the most common type of loan, which would most likely be the 30-year fixed rate loan where you would have a fixed rate over the timeframe of the loan, which is going to be that 30-year timeframe. Now of course, if you deviate from that, one way to deviate from that is to say, well I'm going to try to get an adjustable rate. When you get the adjustable rate, then clearly what we're trying to typically do is lower the rates up front and then pray and hope that the market will be favorable to us going forward because the rate can then adjust going forward depending on the market conditions. So clearly then if that is the situation, the question would often be then, well at what point in time would I want to basically, could I lock down the rate going forward and you're doing a bit more, a lot more guesswork. So when you're dealing with the adjustable rates, there's a lot more risk that you have to put into the equation. That's the point because obviously when you're talking about the bank side of things, they're balancing out the risk versus the reward to their side and if they can adjust the rate then they're taking on less risk. That's why you get the lower rate up front than you would get on a fixed rate 30-year because in that case on the fixed rate, the bank is the one that's taking on more of the risk, right? So that's the trade-offs that we're kind of looking into. If you don't lock and interest rates rise, you could end up paying thousands of dollars more over the life of your loan. So when you take out the loan, you might have the option to take the fixed rate or the adjustable rate. If you pick the adjustable rate, it'll typically be a favorable rate. In other words, a lower rate at least up front, which is probably the reason why we would be picking an adjustable rate. The reason it would be lower resulting in possibly lower monthly payments is because we would be taking on more of the risk as opposed to the bank taking on more of the risk. The reduced risk to the bank allows them to offer the loan at a lower amount. So clearly going forward from that point, you could think what's going to happen from this point going forward. If the market conditions put pressure that actually has rates decrease on the market, then we could make out and have a positive choice to have done that. That would mean the chance kind of went in our favor possibly. But if the rates on the market go up, then that's going to work against us because that would mean that the bank could then possibly, depending on the terms of whatever the adjustable rate terms are, increase the rate and then we would be paying more at that point in time. So the question then is what's going to happen with the market and how is the loan going to be adjusted with relation to market conditions? So how mortgage rates work? A mortgage rate is the interest rate you pay on your mortgage. So you can think of the rate as basically kind of the interest that's going to be determining what the interest is. Interest is basically the rent on the purchasing power of the loan that we have. We got the money, we're borrowing it in order to buy a home and we got to pay rent on the purchasing power until we pay the principal back. That's basically the interest calculation. Rates generally rise and fall throughout the day by a fraction of a point and can rise and fall by several points over the course of a year. So when we're talking about basically the market rate, if you are basically looking into a loan at different time frames, there's going to be fluctuations to what the market rates will be at those time frames. So the question is when you get the loan that you're going to be taking out, if you get a fixed rate, then you're saying, hey, look, I don't want to deal with the deviations on the adjustable rates. I want to get a fixed rate for the term of the loan. If you do that, then again the bank is taking on the risk for those fluctuations in the market rate going up and down. If you get the adjustable rate, then you're picking up more of the risk for those fluctuations in the rates. So with a long enough timeline, mortgage rates can change drastically. So clearly if you're taking out a loan over 30 years or even 15 years or 10 years, that's a pretty long time that the market rates can fluctuate a lot within that time frame. Deciding when to lock your rate, making the decision on when to lock your rate can be very difficult. You can spend hours reading news reports, data on the bond yield curve, analysis of inflation rates, job market growth, memos from the Federal Reserve and still wind up feeling even less certain of when to lock in your interest rate than when you started. So clearly there's a lot of factors. If you're trying to get down and get very specific on what's going to happen with the market rate, then that's probably a place that you do not want to be. You can get a general idea and say, hey, look, this is the way things have been for an extended period of time. So you would have to expect that over some fairly long timeframe that you would think that the market rates might go up or down. That's something that you might possibly be able to do. But when you try to get into the weeds where you're trying to guess the day-to-day activities, then you're basically doing something that everybody is trying to do when they're doing short-term kind of trades and transactions. You're kind of trying to beat the market. And that, of course, can be a difficult thing to do. So you might try to take a step back. It would be nice to have kind of a cushion involved in the event that things don't go your way if that would be possible and then try to get a larger perspective of where the trends are going to be. So for example, if you're in a timeframe where the rates have been historically low for a long period of time and you're taking out a 30-year loan, you would expect that the rates can't go too much lower after that point. They might. I mean, it's possible. But you would expect that at some point within that long timeframe that the rates would go up and then the question would be, of course, at what time would it go up? You can do the same thing on the high-end side of things if you were in an inflationary period for a long timeframe. The problems with the housing market or one of the problems is and one of the problems with interest rates and inflation in general is we tend to get into fairly longer cycles. So you start to say, okay, it's been 10 years now. Maybe this is the new normal. This is the way it is. Nothing is going to change from here. Interest rates are never going to go up past this point now because the Federal Reserve has fixed it or something. They figured something out and then, of course, something changes. And then you could have a long period of high interest rates for a long period of time. You're just like, okay, I guess that's the way it is. We just got 12% interest rates for like 10 years. That's okay. You get these long curves. And then people's predictions are, of course, in alignment with the fact of what they've seen for the last 10 years. And when you're talking about analysts that most of their lives have been in this one condition, you know, they tend to think that that's the way things will stay all the time. So one large natural disaster, impactful day on the stock market or terrorist attack can change mortgage rates significantly. And these can be hard to predict. So any one kind of occurrence can obviously affect the interest rates and clearly just government policy over a long period of time has an impact. So you would think that if you're running red, if you're running close, if you're running on artificially low interest rates, for example, for a really long time period, you can kind of blame the natural disaster that kicked off the fact that you can't do that forever. But really, that's part of the big part of the problem is that we've been running this way for a long time. And so something's going to kick it off at some point. That would be like your immune system being completely compromised, and then you blame the cold, which wouldn't have killed the two-year-old as the thing that killed you. Well, yeah, but that's because your immune system was compromised for quite some time. So as of March 2022, rates are rising and are expected to continue to do so. So at this point in time, you would expect the rise. The interest rates are starting to go up. The Federal Reserve is indicating that the rates are going to go up. That would be bad for long-term adjustable rates you would like to be fixed typically at that point if you could. Without a crystal ball, predicting a future mortgage rate is much like predicting the value of a specific stock. An educated guess is that rates will be lower in March 2022 than they will be several months from now as the Federal Reserve is expected to raise rates again. So clearly at this point in time, the Fed is indicating that rates are going to go up. They tried to say that all the economists were saying that this thing was transitory, inflation is transitory, and this and that. I'm not sure if they actually believe that, or if it has just been so long since things have changed or what. But in any case, it looks now like the interest rates are going up, so they're going to have to take a move at least to curb it. And the question is, can they curb it? And it goes back down? Or is it something they're not going to be able to curb? I tend to be on the side of I don't think the Reserve has the capacity to take as much action as they otherwise would due to the fact that they have a dual mandate. It's not just about interest rates these days. They've got the employment mandate, and so that means that they can't take as aggressive action as possibly they could before they had that kind of tool mandate. So I tend to think they're going to undershoot, but they're putting aggressive posture in place right now at least. So if you are considering purchasing a home or refinancing a mortgage, locking your rate in near future is likely to save you the most money. So if you could lock in the rate now, you would think there would be more risk to an adjustable rate at this point in time than prior periods because you would expect the market rate to go up would be the general thing. So if you can lock it down, that would probably be good. When I grew up, a lot of people like in my parents' generations took out the standard 30-year fixed loan, and it happened to be a really good thing because they went through a period of much higher inflation than in my lifetime, most of my lifetime, there has been inflation now which has been historically low, artificially historically low, which is one of the things in my opinion that kind of compromised the immune system of the economy that means we can't really react as we could if we had the loaded ammunition loaded and ready to deal with a problem when it comes along. But in any case, that could happen now we could go back into another inflationary time frame, and if you have debt that you locked down at 30 years on the home, then you got cheap money if the interest rates jumped up. Like if you've got a loan for like 3% loan right now and then all of a sudden interest rates were at like 12% or something, then you got like basically pretty cheap money at that point and then the investment could turn out good. But again, that's what everybody in my generation is thinking, which means if the whole market is thinking that, that might not be what happens. So if you're actively shopping for a home, keep in mind that the current real estate market is very competitive. Many accepted offers include a short timeline for closing and locking your rate quickly helps you close on time. So if you delay locking your rate, you may miss your deadline and could potentially lose out on your home. So there's a lot of competition in the market and again, I think that in part are people that like me that watch their parents' generations home be such a valuable investment at the point of time when there was an inflationary period and we've been anticipating an inflationary period for a long period of time and either some people have or other people have thought that and they still think that inflation is now a thing of the past. The Fed's going to stop it out and it's no longer a thing anymore. It doesn't get out of control anymore. So it just kind of depends where you're at. But a lot of people think that the inflation might go up and one of the ways they might try to handle that is see if they can invest in a home locking down a mortgage, for example. So in this situation, locking as quickly as possible is advisable. So what if rates fall after I lock? So now you might say, well, what if I lock the rate and that means I'm kind of safeguarding myself against the rates going up but then if the rates fall, what if the Federal Reserve handles this thing and they actually do it. They actually do the soft landing as they call it. They keep on saying over there at the Federal Reserve and the interest rates go back down to like nothing again and that happens. Well, now your rate is higher than the market rate and you might look into like refinancing or something. So if rates fall after you lock your rate, you still have options. You may be able to stop the process with your current lender and start over with a different lender to lock in a lower rate. So if it happens during the point that you're getting the loan, then maybe you kind of start it over and see if you can lock in the rate. If you paid any appraisal fees to the first lender, you'll still have to pay them with the second starting over with a new lender. It may also delay closing, which could mean losing out on your house if it has a strict closing deadline and will mean you wasted your first lender's time. Some lenders even charge additional fees if you cancel the process. So make sure you check for fees before deciding to start over with a lower rate. So what role does the Federal Reserve play? So the Federal Reserve, if you look into any of this market kind of stuff and the interest rates, everybody, it seems like everybody thinks that everything relies on the Federal Reserve as if the Federal Reserve can completely control the rates and they have a lot of influence, of course, on it, both in terms of possibly their actual influence and then the perception that people have. So every kind of move that the Federal Reserve moves, the market has a reaction to it. So the Federal Reserve plays a significant role in determining your mortgage rate. So while they don't set mortgage rates directly, they do set the federal funds rate. The Fed meets eight times a year and mortgage rates change both in anticipation of what the Fed will do and in reaction to what the Fed actually does. The Federal Reserve has started raising rates with the most recent rate hike occurring on March 17, 2022 with more expected this year. This rate increase has already had an impact with mortgage rates climbing and with suspected future increases is expected to continue to cause them to rise. So what happens if I never lock my mortgage rate? You eventually would have to lock your mortgage rate or you won't be able to close on your loan. Your lender is required to give you closing disclosures within certain timelines that details your rate and closing costs. Your lender can't prepare an accurate closing disclosure if you don't lock your interest rate. If you delay locking your interest rate, you may end up with a much higher interest rate if rates rise. If you're close to the limit of your budget, then a higher interest rate may actually make you ineligible for your loan. The bottom line, choosing when to lock your mortgage rate can be an excruciating process for those of us who overanalyze everything. So yeah, that's true. Almost every major event can and will affect mortgage rates and costs or have home buyers thousands of dollars. So as of March 2022, locking your rate sooner then later will likely to give you the best interest rate as the Federal Reserve is expected to raise rates several more times this year if the job market continues to stay strong. So in this case, you would expect, in this market, you would expect rates are pretty much on the rise. So if you can lock the rate earlier at this point in time, it'd go up. But if you're watching this in a future point in time, then again, you got to kind of judge, engage the market. It's not always so straightforward in terms of what direction the rate is likely to go.