Lock in or not lock in a mortgage rate...that is the question

Rental Property Investor · Chalfont, PA · Member since 2021 · 189 posts · 90 votes

Hello,

I'm under contract for a new build townhome in Charlotte NC. We plan to rent it and hopefully see some appreciation over time. My issue is we close in Aug/Sept and the rates are obviously climbing. when I speak to the mortgage lender they recommend waiting rather than paying the cost to lock in. I am wondering what your thoughts are regarding the decision to pay to lock in a rate vs waiting, given that the property will be rented.

thanks,

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Kyle DeutschmannPro Member

Investor · Washington, DC · Member since 2017 · 428 posts · 205 votes

Quote from @David P.:

If your property to is on the higher end I would suggest a jumbo loan. I just closed on a duplex with a jumbo loan on 4.875% with no points. Everywhere else was quoting me in around 6 or above. In the past jumbo loans were typically higher but for whatever reason they been lower then standard loans. I just asked my agent and they are now at 5% no point for jumbo loan so has gone up some but still way below what you hearing from other places.

I agree with this - according to Mortgage News Daily, avg. jumbo loan rates today are 5.15% compared to 6.22% for a conventional loan. So if you're close to jumbo territory (above $647,200 in most areas) then a jumbo loan might be the way to go. I also have clients considering ARMs now - they're usually fixed for the first 5-7 years so there's not a lot of risk initially and sometimes depending on the loan type the rate could be .25-.5% better on an ARM.

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Reid Chauvin
Lender · Nashville TN - Licensed in AL AR DC FL GA LA MD TN, TX and VA · Member since 2021 · 583 posts · 338 votes
4y
@Brian Plajer - it's ultimately all guesswork in trying to ascertain whether rates will be higher or lower 2 months from now. I've been a proponent of locking in a rate as soon as you are under contract. People who've opted to wait and hope for improvement or plateau in rates have been sorely disappointed this year. With new construction, one of the things that makes locking in rates more difficult is that there's always a chance the home is not ready in time for the closing date/lock expiration date, and then you have to pay more money to extend the rate lock. I would try to understand if that is why your lender is advocating for you to wait to lock, or do they really think rates will be lower.
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Andrew Garcia
Lender · Charlotte, NC · Member since 2022 · 739 posts · 410 votes
4y
Hi @Brian Plajer, if you were to lock today, you would need a 90-day lock most likely.
The lender might not have the ability to lock for 90 days so they might be holding out.
You are not paying a fee per se for locking now. You will have a higher rate, though.
I had a client that was under construction for a new build in March, closing in June.
She did not want to pay the higher rate and was so certain that rates were going down that she could do a 30-day lock.
The rates went up and I told her to lock again at a 60-day. She dug in again and by the time May rolls around, her rate was almost two points higher.
My suggestion is to lock your rate now. Even if rates stabilize and you are paying an extra 1/8 of a point, does it matter more than running the risk of paying 1/2 point higher in rate?
Hope this helps! Let me know if I can be of any assistance.
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David P.
Member since 2020 · 404 posts · 235 votes
4y
If your property to is on the higher end I would suggest a jumbo loan. I just closed on a duplex with a jumbo loan on 4.875% with no points. Everywhere else was quoting me in around 6 or above. In the past jumbo loans were typically higher but for whatever reason they been lower then standard loans. I just asked my agent and they are now at 5% no point for jumbo loan so has gone up some but still way below what you hearing from other places.
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Kyle DeutschmannPro Member
Investor · Washington, DC · Member since 2017 · 428 posts · 205 votes
4y
Quote from @David P.:

If your property to is on the higher end I would suggest a jumbo loan. I just closed on a duplex with a jumbo loan on 4.875% with no points. Everywhere else was quoting me in around 6 or above. In the past jumbo loans were typically higher but for whatever reason they been lower then standard loans. I just asked my agent and they are now at 5% no point for jumbo loan so has gone up some but still way below what you hearing from other places.

I agree with this - according to Mortgage News Daily, avg. jumbo loan rates today are 5.15% compared to 6.22% for a conventional loan. So if you're close to jumbo territory (above $647,200 in most areas) then a jumbo loan might be the way to go. I also have clients considering ARMs now - they're usually fixed for the first 5-7 years so there's not a lot of risk initially and sometimes depending on the loan type the rate could be .25-.5% better on an ARM.
[email protected]
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Conner Olsen
Real Estate Agent · Austin, TX · Member since 2020 · 1k+ posts · 941 votes
4y
@Brian Plajer Maybe the lender wants you to lock in later so it'll be at a higher rate? Just a thought
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Brian Plajer
OP
Rental Property Investor · Chalfont, PA · Member since 2021 · 189 posts · 90 votes
4y
@Conner Olsen that is part of my worry. On one hand they could be looking out for me on the other they benefit as rates are only going higher between now and Sept. the fed is advertising that.
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Brian Plajer
OP
Rental Property Investor · Chalfont, PA · Member since 2021 · 189 posts · 90 votes
4y
@Kyle Deutschmann thanks Kyle...can you convert an ARM to a conventional loan just before the rate adjusts, assuming it makes sense to do so?
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Scott TrenchPro Member
Rental Property Investor · Denver, CO · Member since 2014 · 2k+ posts · 6k+ votes
4y
I see it as a 50/50 whether to lock in or not. Given that, I'd lock. You likely already want the deal and it likely makes sense to close on it at current rates.
If rates go up, you've saved yourself a boatload of money - and more importantly, the deal still works for you because you are locked in. If rates go down, then you could have made money, but you are still getting the deal at a rate that made sense.
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Kyle DeutschmannPro Member
Investor · Washington, DC · Member since 2017 · 428 posts · 205 votes
4y
Quote from @Brian Plajer:

@Kyle Deutschmann thanks Kyle...can you convert an ARM to a conventional loan just before the rate adjusts, assuming it makes sense to do so?

Yes, most residential mortgages do not have prepayment penalties so you could refinance into a fixed rate mortgage at some point in the future. I don’t have a crystal ball, but I would hope that rates drop sometime in the next 5-7 years. If they don’t - there are ‘caps’ at how high the rate can go. Typically something like 2/1/5 caps (can’t go more than 2% higher the first time it adjusts, can’t go more than 1% higher each additional adjustment, can’t go more than 5% higher than the original note rate ever) - so there is a limit to your overall risk.
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Colleen Goldstein
Real Estate Broker · Matthews, NC · Member since 2017 · 135 posts · 99 votes
4y
@Brian Plajer no telling but if I was you I would be locking. The current sentiment is that rates will continue to rise.
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