Decision Time
When to Lock Your Rate?

One of the most difficult parts of the mortgage process for a refinancing homeowner is making the decision to move ahead and lock their rate. There are a host of reasons why people delay their refinance lock, some which are valid, and others which may end up costing them thousands to tens of thousands of dollars in lost benefit.

Sometimes, you can almost hear the rate lock inner-argument within the mind of a refinancing homeowner. Oddly enough, in many cases, the better the deal, the more struggle for a decision to lock or not. People will agonize, shop for more rates, agonize again, and so on.

Most of us have gone through this type of agony to some extent, even with much-less important purchase decisions. Take a look at the following example from a man destined to "agonize" over a rate-lock decision. Yes, a home loan is much more significant than a washer/dryer set, but I think you will get the point.

"I was looking to purchase a new washer/dryer set after our current set wore out. I knew the size needed, color wanted, and features that were "must have" and others that would have been nice. I wanted the set for a certain price and found exactly what I was looking for at ABC Appliance Store and it was less than what I expected to pay. But wait a minute! XYZ store may have it for less! I searched XYZ Store, Widgets-are-Us, Crazy Larry's Discount Palace, and 5 other stores and found the same or similar sets for about the same price.

Hold on! There may be a sale at one of these stores soon, and I'll just wait! After 6 months of "laundry-day" at the public Laundromat, the washer/dryer set prices were still the same, I had spent a crazy amount of time checking updated prices and searching stores, so much so, my wife wanted to put me through a cold wash cycle and hot tumble dry!

We (my wife) couldn't take it any more, so I immediately rushed out to ABC Appliance Store and purchased the original set that was available 6 months prior at the same price, and felt lucky to get it.

A funny thing occurred immediately after the purchase. Peace of mind! I was confident that I had made the proper decision, purchasing a good product at a fair price, and that it would produce benefits far into the future. As another benefit, I have not looked at a washer-dryer price since! I don't care whether the prices have gone up, down, or if they are giving them away for free, because I made a well-reasoned decision for my circumstances, based on a fair price at that point and time, for the much needed benefit of laundry-day at home.

If only I had this frame-of-mind 6 months prior! I would have saved a tremendous amount of time and effort spent searching, and avoided the frustration and "loss of benefit" by delaying the purchase. Plus, my wife would have been much happier, and no one can put a price on that benefit!"

You guessed the moral to this story. Waiting for a better deal, right around the corner, when you already have a good deal in-hand, can come back to haunt you.

In this section, we will discuss the decision-making process pertaining to home refinance. We will cover Risk/Reward, Risk Factors, Decision "Freeze", and the decision-making process of successful people. Hopefully it will give the reader the perspective and awareness needed to make a confident decision, one way or the other, for their rate lock decision.

Risk-Reward
Can You Risk Current "In-Hand" Benefit?

The first step toward assessing risk and reward is of course, to determine what is at risk. This is simply accomplished by taking your current Principal & Interest (P&I) payment plus all minimum monthly payments for debts being consolidated, if applicable, and subtracting your pre-qualified proposed new "Bottom-Line" P&I payment.

For instance, suppose you are looking to refinance your first mortgage and 2 credit card balances. The P&I on your mortgage is currently $1,250 and the minimum monthly payments on your 2 credit cards total $150. You get pre-qualified for a debt-consolidation refinance loan at a lower rate, which would result in a proposed new P&I bottom-line (after rolling-in closing costs) payment of $950.

$1,250 plus $150 (current payments) minus $950 (proposed new payment) = Monthly Risk

Your monthly risk would be $450. In other words, you would be risking an "In-Hand" benefit of $450 for each month that you wait to lock your rate with a new home loan.

Example of Risk by Waiting-
Extend Over Timeframes

Lets take a look at a real world example. A homeowner has been in a 6.5% 30-year fixed rate mortgage for 4 years and wants to refinance into a new 30-year loan at a lower rate. Her current P&I payment is $1,959 and the principal balance is currently $295,000. She is pre-qualified for a new 30-year fixed rate at 5.0%. With all closing costs, pre-paids, and escrow deposits, her new loan amount would be $305,000 with closing costs rolled-in, resulting in a new payment of $1,637 per month.

$1,959 (current payment) minus $1,637 (proposed new payment) = $322 Monthly Risk

The following table reveals the Savings Benefits Lost (RISK) by delaying the rate-lock decision.

As you can see, it doesn't take long for a delayed decision to create a significant financial impact. If the homeowner declined the 5.0% and delays locking a rate altogether, she stands to lose a net savings of $115,920 that was available to her.

Example of Rate Lock Delay
When Rates Drop in Future

This scenario is built upon the previous example. The borrower did not lock at 5.0% when offered, and by waiting, the homeowner was able to lock at their rate at 4.75%.

Keep in mind, especially when the mortgage rate market is already at or near historic lows, a reduction in rate by .25% is a rather large rate drop for the same lender fees and closing cost.

The borrower's new P&I payment is $1,591. If the homeowner had locked at 5.0% when offered, her payment would have been $1,637, so the net monthly savings is $46, for the risk of delaying the rate lock.

If the borrower waited one-year to get that 4.75% rate, it would take her 7 Years just to break-even, by not locking the initial 5.0% rate when offered. ($3,864 loss in benefit by waiting one year to lock, divided by the additional $46/mo savings with the 4.75% loan program).

This scenario appears to weigh heavily to the "Risk" side of the equation when compared to the "Reward". Especially in light of the fact that rates will have to move significantly downward from an already historic low level.

In fact, many homeowners will delay a lock, even after rates have dropped to their "target" goal because "rates will go lower"! This (greed) has caused many people to panic as rates reverse and end up locking at the initial rate available to them months prior or at an even higher rate! Some never refinance at all, and lose up to tens of thousands in net savings that was readily available to them.

Example of Rate Lock Delay
When Rates Rise in Future

This scenario is built upon the previous example. The borrower did not lock at 5.0% when offered, and by waiting, the homeowner was able to lock at their rate at 5.25%.

The borrower's new P&I payment is $1,684. If the homeowner had locked at 5.0% when offered, her payment would have been $1,637, so the net monthly loss is $47, for the risk of delaying the rate lock.

If the borrower waited one-year to get that 5.25% rate, her first year loss in benefit would be $4,428 , by not locking the initial 5.0% rate when offered. ($3,864 loss in benefit by waiting one year to lock, plus the $564 yearly loss with the higher rate 5.25% loan program).

This example illustrates a very common example of significant benefit lost, not to mention time spent and the frustration/tension associated with delaying a major decision.

Rates Drop All the Time - Don't They?

You might think that it's easy to just sit back, relax, and wait for mortgage rates to drop further, even when you already have a beneficial pre-qualified interest rate available to you. Right? Well, it might not be that easy, particularly when mortgage rates are near historic lows and the 10-Year Treasury yield is under 4 percent. To answer the question, yes, interest rates drop quite frequently. Unfortunately, they also rise frequently, and usually at a quicker pace then they drop.

Here's a real-world example. In January 2008, mortgage rates dropped near 5.25 percent for a "par" or "even" rate, and near historic lows. Refinance applications increased and many borrowers took advantage of very beneficial deals that created significant long-term financial benefit. Then there were the "Fence-Sitters" (those gambling that rates would drop further), with the same big benefits available to them, but they waited to lock. They held out for an even better rate, and you guessed it. Rates slowly crept up from January and into the spring. The fence-sitters, kicking themselves, and hoping for another drop in rates.

Unfortunately, rates went up further and were approaching a 6.5 percent "par" rate during the summer months and any hope of benefit disappeared for a portion of the fence-sitters. Then, mortgage rates dipped later in the fall and into the winter and many of those that "froze" during the January 2008 rate lows, sprung into action and locked rates in the mid and upper 5 percent to 6 percent range. They lost out on nearly a year's worth of fantastic benefit for a good benefit at a higher rate. Yes, this is a common scenario.

Now comes January 2009, and the government takes action to help the mortgage market. Rates drop quickly again to that 5.0 percent par rate and would venture to guess that any of the remaining January 2008 fence-sitters jumped in to lock their rate, or had simply given up. Yes, the very same deal available one full-year prior. The fact of the matter is, those that waited the January 2008 lows were extremely lucky to get the January 2009 rate drop. Unprecedented economic and governmental actions were the magic elixir that caused the drop, and that type of intervention and yearly rate movement is extraordinary.

The year 2009 was welcomed in with a whole new crop of fence-sitters, waiting for further rate drops. The cycle repeats itself.

We use the term "Fence-Sitter" to help refinancing homeowners become aware of the risk involved with waiting for rates to drop further, when they already have a significant financial long-term benefit in-hand. Sometimes, just recognizing the "fence-sitting" pattern of reasoning in your own mind can help you to make a wise decision, and not look back.

Little Relative Refinance Benefit ?
You Have Time to Wait

We have been discussing refinance rate-lock decision scenarios where the homeowner has a significant benefit at decision time. Yet, there are many scenarios where a homeowner's relative benefit is small, and waiting to lock your rate is most likely the wisest decision of all.

For instance, suppose market mortgage rates are at or near historic lows, but the refinancing homeowner has a low credit score, or high Loan-to-Value (LTV) scenario, the qualified interest rate and/or addition of private mortgage insurance (PMI) may reduce the bottom-line benefit to such an extent that it is worth the risk to wait.

You take measures to improve your credit score, and/or wait for home appreciation and current mortgage principal reduction to lower your qualified LTV. At this future point and time, after improving your qualified refinance scenario, even if mortgage rates had increased during your wait, you are most likely in-line for a better overall qualified bottom-line benefit for the long-term.

Don't just lock a rate because it's the lowest rate on your block, if the benefit is not there. Mortgage rate envy by your friends and neighbors will not fill your pockets with cash.

Risk Factors to
Delaying Your Rate Lock Decision

The following are "Risk" factors to consider when delaying your rate-lock in hopes of lower interest rates in the future. Those refinancing homeowners that have a current pre-qualified mortgage rate opportunity that results in a current good to excellent bottom-line benefit scenario, should pay particular attention.

Loan-to-Value Ratios and
Declining Home Values

Loan-to-Value (LTV) ratios pay a pivotal role in the qualified mortgage refinance rate that a homeowner will be eligible for.

Say for instance, that you are currently pre-qualified for a refinance loan at a favorable rate of interest and that your home's current market value is $200,000. You either cannot afford to, or do not wish to pay closing and settlement costs "out of pocket" at loan closing. Your total loan amount is $155,000 with closing and settlement costs rolled-in to your potential new loan. This results in a 77.5% LTV ($155,000 loan amount divided by $200,000 home value). Since the best mortgage refinance rates are qualified for LTV's under 80 Percent, you are sitting pretty on interest rate, and do not have to pay private mortgage insurance (PMI) to boot.

You heard on the news that mortgage rates could come down later in the year, so you decide to wait, and risk your current benefit to possibly get a .25% lower rate in the future.

8 months later, overall national average mortgage rates do drop by .25% and you decide to jump on the deal. In the meantime, some bargain-hunting homebuyers have purchased homes at bargain basement prices in your area. Some of the homes bought, are similar to yours, which has brought down the market value of your home to $185,000.

Your qualified LTV is now sitting at near 84% so a premium of .375% is added to your rate for being over 80% LTV. What's this? My rate is now .125% higher than I could have had 8 months ago even though rates have dropped? Unfortunately, yes. In addition, you will be required to pay over $100 per month extra for PMI and your deal is much less favorable than your opportunity 8 months prior when mortgage refinance rates were higher!

Now, this example is assuming that you timed the mortgage rate market perfectly and took action on the rate dip. In the real world, perfect timing in conjunction with action is a rarity.

You also may feel that home values only go up, so a home value issue is really no risk to you. Again, in the real world, home values can decrease, depending on overall housing market conditions and regional/local variables.

You only have to look at national home value declines from 2007 to 2009 to understand that home values can and do decrease, and sometimes by very significant percentages.

The Credit Score Dance

Credit scores are now more important than ever for refinance mortgage rate qualification grading. Anyone who checks their credit score on a periodic basis will know that scores can change significantly in a short period of time for a number of reasons, such as debt mix ratio, missed payments, or even incorrect information that is submitted to the credit bureaus. You may also notice that scores drop a heck of a lot faster than they go up, even if you are an innocent bystander in the way of a faulty credit bureau reporting error. Lenders will qualify your refinance rate according to your reported FICO credit score, even if it recently dropped due to an error on someone else's part.

Risk of credit score decline should be of particular importance to those that are consolidating debt with their refinance. By holding off on locking your rate (assuming that you are already pre-qualified at a rate that is providing significant benefit), your credit score is in prime shape for a drop if you add any more to your debt during your wait for mortgage rates to drop further.

The mortgage qualification credit tier bands are getting tighter and a drop in your credit score by one tier could mean the difference between a great-qualified interest rate and a really good interest rate. Your score drops two tiers (remember, the tiers have contracted) and the difference can go from a great rate to just a good rate.

If you currently have a significantly beneficial qualified interest rate "in-hand" based on your current credit score, and you decide to wait on locking that rate, you risk that your credit score falls into a lower tier if and when mortgage rates drop further. In the end, it is possible that you end up with a higher interest rate, plus the loss of the "in-hand" benefits for the amount of time that you delayed your rate lock.

Refinance Home Loan Program Availability

Listen to all the people who delayed locking their "stated-income" and "low doc" loans in 2008, or the many that delay on locking low mortgage rate FHA loans that had sub 620 credits scores in 2009, or maybe even the homeowners that refused to lock great-benefit cash out refinances over 85 percent LTV in 2009.

They are most likely kicking themselves now because those programs are pretty much gone now, when they had ample opportunity to lock at historic low rates previously. Their advice to those that are delaying significant benefit locks now might go something like, "Lock-Now, or Forever Hold Your Current Mortgage"! Yes, this is a bad attempt at humor just to illustrate a very serious risk for refinancing homeowners. The program you are qualified for today, may not be there tomorrow.

The fact of the matter is, the unprecedented US housing and banking crisis experienced in 2008 and 2009 has resulted in a mortgage loan restriction for offered programs among home loan lenders. Underwriting guidelines have become much stricter, particularly where they concern income, credit, and equity for qualification.

Negative changes in income, home value, or credit score, occurring while you wait for rates to drop further could significantly effect your qualified refinance rate and program options, or possibly take you out of the game altogether.

Why Homeowners "Freeze"
at Rate Lock Decision Time?

I'm Gonna Think About It

A common homeowner response to a refinance lender offer over the phone is . "I'm Gonna Think About It", quickly followed by the "And I'll call you back". Those in the lender business know that they will most likely never hear from this person again. They know that the potential borrower will probably be making their best effort to talk themselves out of that deal, even when the benefits are truly significant.

Don't feel alone if you fall into this camp, as most people react the same way. They may think there is a better deal around the corner, or maybe fixated on a certain interest rate that they must have, or just become confused with all the numbers and options being thrown at them so quickly.

The point here is that you now know how to structure your loan for your specific financial scenario, where to find low refinance rates, and how the loan process works, by taking advantage of the learning aids here at the Refinance Tool-Box. You know about closing costs and bottom-line benefits and how to weed-out a "spotty" lender. You will not be intimidated by the quoted numbers, timeframes, qualification requirements or loan program options relayed by your lender.

Yet, you still may fall prey to the old "Freeze" reaction when it comes time to lock your rate, which can cost you time, aggravation, and possibly a boat-load of potential savings when you are currently staring at a pre-qualified offered loan program with significant benefit.

The following topics are some of the major common reasons why people hesitate to lock a great loan. Although we cannot cover every reason, we think you will get the point. Sometimes, just becoming aware of the "hesitation" pattern in oneself is enough to get them off the fence to take action on an opportunity that will provide significant long-term benefits at a low risk.

Human Nature

It is human nature to want to keep things as they are, especially when concerning a transaction as significant as a new home loan mortgage. This "Stay-Put" attitude that is inherent in most of us, will cause many to delay rate locks or refinancing altogether, even when the new loan will produce significant long-term benefits. You know the old saying . "You better watch out what you ask for, because you just might receive it". This happens all the time. A refinance shopper will want a certain rate, fees, and overall benefit, receive a lender pre-qualification for an even better deal than anticipated, and immediately say the famous words "I'm gonna think about it".

Often times, it's just a matter of being aware of this internal drive to "Stay-Put" as you are in the decision-making mode. This self-awareness can really help one to avoid decision delays and take action on beneficial opportunities when they arise.

Financial News and False Prophecies

If "I'm Gonna Think About It" is the number one delay-tactic response given by refinancing homeowners, can you guess what's number two? You got it . "I'm Gonna Wait for Rates to Drop a Bit More".

Now, if you have a refinancing scenario with little benefit at the current rate, then by all means, you are wise to wait, in the event that an improved opportunity arises in the future.

On the other hand, if you are currently pre-qualified for a home loan that will provide significant long-term benefits, delaying your decision for rates to drop could be one of the costliest "non-decisions" you will make. Based on the previous risk information, even "if" you hit it just right and get that rate drop in the future, you may be worse off than if you had locked at the higher rate much earlier. That is not to mention the number of people that wait, only to lock at the same or higher rate (in panic) in the future. In fact, some will hold off and never refinance at all, losing up to tens of thousands in benefits over the long-term.

Much of the reason for the rate drop waiting game can be attributed to financial news. You can't blame people. They hear so-called financial experts exclaiming that mortgage rates will drop further down the road and some even give irresponsible percentage figures that cause people to freeze in their tracks come rate-lock time.

The truth of the matter is that no one can predict where mortgage rates will go, and these financial experts are wrong so very much of the time. It's no different than the stock market, and anyone that has followed the great rise and fall of the markets will know that financial experts may not be so expert at all, because they are so often just plain wrong!

There are too many (unforeseeable) variables that can cause mortgage rates to rise or fall. Delaying your lock based upon a Fox News business analyst's prediction that rates will drop a half-point in the next six months is extremely risky when you are currently sitting on a beneficial pre-qualified refinance opportunity. When rates go up by one point six months later, you won't hear this same "expert" proclaiming how prophetic he or she was. They also won't sweep in to cover the benefits you lost by relying on their prediction.

Your rate-lock decision can be a real struggle when you keep hearing that rates will drop further. Your inner-voice is shouting that you will be missing out on a better deal down the road if you lock now, while the rest of you wants to lock now and not risk the significant "sure-thing" benefit.

You now know that relying on the mortgage rate predictions of family, friends, neighbors, and the so-called "financial experts" is very risky business. Locking your rate while you have a beneficial refinance program "in-hand" is most likely the best way to go.

The worst thing that will happen by locking now is that rates will drop in the future, and you "may" end up with a slightly less beneficial scenario over the long-term. The worst thing that will happen if you delay your lock is that rates will go up in the future and you will either lose a significant portion of the benefit previously available "in-hand", or not refinance altogether and lose the whole enchilada!

Lender Trust

Many people have trust issues when it comes to dealing with mortgage refinance lenders. Some may have had negative personal experiences, heard some lending horror stories, or have read a handful of not-so-flattering media articles on the home loan lending industry.

Now, much of the negative press and "horror stories" relating to refinance lenders is not accurate. Many lenders catch a bad rap for loans that do not close or for legitimate reasons why programs need to be changed midstream.

The best and most detailed lender pre-qualification and resulting program rate lock cannot offset a home appraisal that comes in lower than expected, an unforeseen lien on the borrower's property, inaccurate or "fibbed" borrower application information, among others, which can cause program qualification changes and in some cases, loan denials. Yet, in many cases, the lender will take the brunt of the heat for any home loan snag, and the resulting borrower "mistrust".

Whatever the reason for mistrust, it can become a major "freezing" point come rate-lock time. The borrower may be wondering if they were pre-qualified properly, and if their loan program quote will change before their loan closes. If you don't trust what you are being told by your lender, locking your rate and loan program will be a challenge.

One way that you can avoid a trust issue, particularly when you expect your locked refinance program particulars to stay the same from lock to close, is to utilize the services of a third-party certified "Upfront Mortgage Lender". With a third-party certified Upfront Mortgage Lender, you are assured a fair and accurate interest rate and closing cost quote. You will receive guaranteed closing costs in writing and your locked refinance program will not change as long as your pre-qualified application and home data is accurate.

If you are unsure who you are dealing with, simply ask your loan officer if they are a certified "Upfront Mortgage Lender" and where you can verify the designation on their website. This should give you the assurance you need for Lender Trust!

Too Good to be True

Another conscious or subconscious reason that homeowners "freeze" when it comes time to apply for a loan and lock their rate is the feeling that the loan benefit stated sounds "too good to be true". It seems too easy and there must be something else that is not being disclosed.

This is common, especially when rates are low and a borrower is refinancing large loan amount into a lower fixed rate, a 1 st and 2 nd mortgage into one lower fixed rate, or consolidating credit cards and other installment loans with their current mortgage into a lower fixed rate. The monthly savings can be quite astounding and may seem almost too good to be true.

The numbers will not lie. As long as you are working with a loan officer that performs a thorough pre-qualification, and follows-up with an underwriting pre-approval process, before you commit to your rate lock, you should feel confident with the numbers presented. That "too good to be true" feeling will evaporate while dealing with a competent mortgage professional and reputable lender company.

Decision Making and Successful People

One way to improve, or eliminate "The Freeze" come rate-lock time is to follow the decision-making process of successful people. A well informed and bottom-line focus, utilizing risk/reward and return analysis can help one to make decisions with confidence and without hesitation.

Well Informed with Bottom Line Focus

A common trait among many successful people is that they are well informed and focus on the bottom-line before making a transaction decision. Relating to refinance, they would most likely investigate the refinance process, determine their qualifying factors, receive a lender quote, then calculate their break-even point for closing costs to reveal their bottom-line benefit based on the anticipated timeframe they will stay in their new home loan.

Risk/Reward and Return

Next, they would most likely conduct a Risk/Reward analysis to determine the merit of waiting on a current rate lock in the event that mortgage rates drop further in the future. Their analysis would include the current "In-Hand" benefit (Reward), and the Risk of forgoing this benefit over a number of timeframes with a rate-drop scenario, rate-the-same scenario, or rate-increase scenario, as mentioned earlier in this section.

He Who Hesitates is Lost

The successful decision-maker would then make a decision to lock or not to lock, and feel confident that they have made the proper decision based on their analysis.

Decisions and Peace of Mind

Remember the opening story in this section about the guy that went through a whole lot of time and aggravation trying to save a few bucks on a washer-dryer set, only to panic back to the original store he shopped to buy the set at the same price available 6 months prior?

He felt a sense of relief, or "Peace", once the decision was finally made. Furthermore, he didn't even care what happened to the future prices of washer-dryer sets once his decision was made because he knew that he had made a well informed decision based on risk/reward and return (whether it was cognitive or not). Unfortunately for him, he wished that he had utilized his new-found decision making process 6 months prior and avoided the stress.

Knowledge is power, and utilizing the principles in this section and the information throughout this website will give you the tools you need to make a well-informed rate lock decision. Whether you decide to lock now, or wait, you will feel confident in your decision and not look back.

Remember, "Now Decisions" bring future "Peace of Mind"

You are Ready!

Refinance