I have been asked to comment on what floating is and why one should float or lock.
When one applies for a loan a good loan officer or mortgage planner will ask many questions. How long are you planning on staying in a home? What are the reasons for wanting a home/loan at this time? What is important to you about your current lifestyle? Do you realize how amortization works? Do you know the difference between a 15 year loan and a 30 year loan? Are you financially savvy and would like an interest only loan and how would you use the difference in money to pay down your mortgage? Etc, etc.
Based on your answers, your mortgage planner will suggest a variety of loans to your and why each is advisable or inadvisable. Then will be the question - Would you like to lock your rate today?
Locking in a rate means that for the next 15, 30 , 45, 60, or 90 days you will have the benefit of that particular rate until you find a house, negotiate the contract, fulfill all the requirements that are needed to get the loan and have the house pass all the various tests that are currently available and negotiated on, and get to the Celebration of signing the documents and getting the keys for your new home.
During this time period much can happen. As stated in Should I float? Should I lock? various economic events can take place that will affect interest rates.
Deciding not to lock means that you would rather float and have rates adjust accordingly each day to the events that unfold in the world. Why would one want to float?
Let us look at an example of what various rates do to a loan for a particular mortgage.
We will assume a 1st mortgage of $250,000. (We are not going to worry about LTV, PMI, or a possible 2nd mortgage - those are for another blog)
| Interest Rate | Monthly Payment | Difference | Total Paid over life of loan |
|---|---|---|---|
| 7.0% | $1663.26 | $598,773 | |
| 6.75% | $1621.50 | $41.76 | $583,740 |
| 6.5% | $1580.17 | $41.33 | $568,861 |
| 6.25% | $1539.29 | $40.88 | $554,144 |
| 6.0% | $1498.88 | $40.41 | $539,597 |
The various gradations appear to be minimal. The greater differences lie in the amount paid over the life of the loan. If your loan size is bigger or smaller than you can calculate these differences rather easily.
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