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Mortgage rates have been unusually volatile this summer, jumping or plunging as much as a quarter-point in a single day. If you’re looking to lock in a loan for a home purchase or for a refinancing, the moving target adds a layer of uncertainty to an already-complicated process.
“For borrowers who are rate shopping, it’s really difficult because they could literally be quoted multiple rate and costs scenarios throughout the day from one or many lenders,” says James Sahnger, mortgage planner at C2 Financial Corp. in Jupiter, Florida.
Why mortgage rates are bouncing around
No central authority sets mortgage rates. Ultimately, rates are established by the investors who buy home loans. Most U.S. mortgages are packaged as securities and resold to investors. Your lender offers you an interest rate that investors on the secondary market are willing to accept.
While the 10-year Treasury yield is an important benchmark for 30-year mortgage rates, investors have been struggling to make sense of the broader economy. How will the Federal Reserve’s aggressive rate hikes affect rates? What impact might a looming recession have? As investors work through those questions, mortgage rates have gyrated.
“Day-to-day and intraday volatility has been the norm for the last quarter and really since the beginning of the year,” Sahnger says.
What you can do
Given the big swings in mortgage rates, borrowers are wise to take advantage of rate locks, says Greg McBride, Bankrate’s chief financial analyst.
“With home prices and mortgage rates already at high levels, affordability is very squeezed for most homebuyers,” McBride says. “Don’t make it worse by waiting to lock your rate and risking a big jump in rates. Locking your rate once you’re within 30 days of closing eliminates that risk and is one less thing to worry about.”
A rate lock protects you from an upward swing in rates. But what if you happen to lock in just before mortgage rates fall a quarter point?
“Ask your lender about a float-down option in the event of a sharp drop in rates after you’ve locked,” McBride says. “It may not be available or it may not be worth it, but it is a question worth asking.”
Lenders sometimes charge for float-down locks, so make sure the potential savings are worth any additional expense.
Even if there aren’t extra fees, there will be some fine print to consider. For example, if rates fall by a tiny amount, it might not be enough to actually put the float-down policy in action. Check the details to understand the threshold that rates must cross in order to exercise the float-down capability.
Making sense of your mortgage options is a challenge even in the calmest financial markets. The task is even trickier amid recent rate volatility.
“It’s really important to work with a mortgage broker that understands the and follows the markets,” Sahnger says.