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To lock in or not to lock in?

That is the question when contemplating today’s record-low mortgage interest rates


Sustained low-mortgage rates, the lowest on record, have provided many first-time home purchasers with the buying power needed to make the leap to homeownership this year.

“We have been setting and resetting new records for low rates over the past couple of years,” says Leonard P. Fernandes, assistant vice president of the mortgage banking department at First Hawaiian Bank. “The data (see chart below provided by Freddie Mac) show just how great these rates are from a historical perspective.”

But with mortgage rates at rock bottom, and nowhere to go but up, the question on nearly every home buyer’s mind is: Should I lock in my interest rate today?

“This is a difficult question to answer,” says Fernandes. “Rates change daily, and it is difficult to judge what might happen that can impact rates. The global economy and markets are very sensitive to daily events (so) it is very hard to say, day-by-day, what the rates will be.”

First Hawaiian Bank offers rate locks up to 60 days. Locking in a low rate gives borrowers the peace of mind of knowing the rates won’t go up, but it’s still stressful knowing they might drop even lower. Those who have locked in during the past 30 days have benefited by doing so, as rates were ticking upward slightly. This week, however, things changed when rates came down again following economic problems in Europe.

“Everyone wants to get the best rates,” says Fernandes. “Higher rates will have an impact on your monthly payment and could affect your qualifying. If rates go up near the closing date of your loan, you may be forced to lock them to be able to meet your purchase contract.”

It is a tricky game to play. When interest rates go down, as they have several times since October 2008 when rates were at 6.20 percent, buyers can either buy their dream home for less money each month or purchase a bigger home for the same monthly payment. When rates slowly drift up, the opposite is true.

Affordability is a function of how much you can afford to pay each month. Simply put, your monthly payment is tied to your loan amount and the interest rate. By locking in a rate, you can hedge against any future increases in mortgage rates ensuring the monthly payment remains affordable.

Fernandes illustrates how significantly the numbers change with just a 1 percent increase. Based on a loan amount of $400,000 with a 30-year, fixed rate loan at 3.75 percent interest, he says, the monthly principal and interest payment would come to $1,852.46.

“(But) that same purchase with a fixed 30-year loan at 4.75 percent interest would be $2,086.59 a difference of $234.13 a month or $2,809.56 a year,” Fernandes says. “Over the course of the 30 years, the buyer would pay an additional $84,285.95 with the higher rate.”

It is a significant outlay of money that comes with rate increases. That is why a discussion about mortgage rates should be a part of any home-buying plan. Once the prevailing rate is within your affordability window, it is likely in your best interest to immediately lock in and not risk a rise in rates that might jeopardize your loan.

“Mortgage rates determine the affordability of your payment,” says Fernandes. “A fixed mortgage rate will mean your principal and interest payment will remain constant for the life of the loan.”

Those buying in select new-home subdivisions may be eligible for an extended lock, which may be available with an upfront rate deposit. Extended locks for new home construction often include a float-down feature, allowing the borrower to have one free float down within the last 30 days of closing, if rates have gone down.

Whether you want to refinance your fixed-interest period on an adjustable rate mortgage that is about to expire, guard against future step-ups in your ARM or simply reduce your monthly payment and lock in at a lower rate today’s 30-year lows make converting to a fixed-rate mortgage worth considering. Talk with your loan officer about how interest rates could affect the likelihood of buying your dream home or reduce your current payment before rates start climbing. First Hawaiian Bank offers a variety of options to fit your needs, making it easy for you to get the necessary service.

“No one really knows when rates will start to rise again,” says Fernandes. “However, most experts do expect rates to stay low through the end of this year.”

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