One of the more confusing parts of buying a home is trying to understand why the interest rate you see advertised online is not the rate you actually end up achieving. You have an excellent credit score, a good job, and a low debt-to-income ratio. You submit all the necessary paperwork on time. Yet, when it’s time to lock in the rate, your lender says they can’t do better than a half point higher than what they originally promised.
Don’t worry – you haven’t been cheated or scammed by a teaser rate. You’ve simply fallen victim to ordinary fluctuations in the mortgage market. Nor do you have to settle for the higher rate. There are several options that aid in lowering your interest rates and saving you thousands of dollars over the lifetime of your loan.
How Did My Rate Get So High?
A Thursday morning meeting of the Federal Reserve, a stock market correction, a political election – all these things, and many more, can affect the mortgage market as it fluctuates over the course of the average trading day. Because mortgages are bonds, they are relatively stable in the long run; however, some weeks and even days there are big fluctuations, and it’s hard to predict exactly when those ebbs and flows are going to occur.
If the rate just happens to jump on the day your lender locks the rate, you could end up paying thousands of dollars in interest payments alone.
That’s Where the Float-Down Comes In
For a relatively low amount of money – typically a fraction of a point, or several hundred dollars – the lender may offer you a float-down on the interest rate at the time she locks in the loan.
While locking the rate removes any risk that the rate will increase while the loan is being underwritten, a float-down lets you take advantage of the lower interest rate that “floats” below the locked rate. The float-down is a “win-win” that can protect you from being victimized by short-term volatility in the mortgage market.
Is a Float-Down My Only Option?
If, for some reason, a float-down is not available, you still have some control over how much you pay for the loan.
• One option to lower the rate is to buy-down the loan.
With a buy-down, you pay money upfront to reduce the interest rate. Another term for a buy-down is “paying points” on the loan. This option typically costs several thousand dollars at the time of closing. It can be a good idea in some circumstances – for instance, if you are certain that rates will increase in the future, or if you plan to hold on to the property for a long period of time.
• Another option is to refinance at a lower rate later.
You don’t need to rely on rates falling lower in order to save money through a refinance. Individuals with less than exceptional credit can simply devote time to improving their financial situation, which will allow them to qualify for a better rate. You can also refinance to a shorter term loan. Your monthly payments will be higher, but you will pay down the principal and build equity more quickly while enjoying a lower interest rate.
The Bottom Line
Float-downs provide an excellent hedge against short-term volatility in the mortgage market, but they are not necessary in every situation. If you receive a competitive rate, locking the loan for 30 or 60 days is completely acceptable. There is always the option of refinancing with better terms sometime in the future.
About Peak Finance Company
Peak Finance Company is a mortgage banker and broker that specializes in solutions-based lending, currently operating in California, Oregon, and Georgia. The company prides itself on offering a personalized and creative approach to the mortgage-lending process, one that makes it possible to offer loans to individuals in a wide variety of circumstances and at the most competitive rates. Make sure to follow Peak Finance on Facebook for more tips and market updates!