To Lock or to Float...That is the question
Many of you out there no matter how seasoned you are as a homeowner, homebuyer, real estate agent, etc.. have probably never heard of the Rule of 67.
What is the Rule of 67? I will tell you its not rule #67 from the 2005 Hit Film Wedding Crashers. (Look up here). Ok, I will admit that I did not come up with this rule but many years ago, a colleague shared it with me, and it just kind of stuck. This rule was actually presented to me as the 67% rule of floating. I like to call it the rule of 67.
What I am referencing here is a theory or principle you can apply when it comes to making a decision on whether to lock in on your mortgage rate or to float. Its really all about risk vs reward. Its Gambling in a sense, but not like the Blackjack table or Craps table. We are talking about one of the largest purchases you will make in your lifetime. So what is this "Rule" all about and why should or would you care. Hopefully, you will gain some insight on how to make this important financial decision and base that decision on more than just a whim or solely on what your Brothers cousin or na?ve Loan Officer told you. Just like getting married or having a baby, there is never going to be the "perfect" time to lock-in. That said, you can use the following rule to help you make a sound decision that you can live with. So just how does this rule work exactly? Before I answer that, please remember this:
Floating a mortgage loan is a risky endeavor
The 67% Rule of Floating
We all can agree that mortgage rates can do only three things: rise, fall or remain the same. When making the choice whether to float or lock, consider this.
If you choose to float:
If Rates fall, you win. If Rates remain the same, you lose** If Rates rise, you lose.
2/3's or 67% of the possible outcomes are negative
If you choose to lock:
If Rates fall, you lose. If Rates remain the same, you win :) If Rates rise, you win :)
2/3's or 67% of the possible outcomes are positive
Remember this. The only person in a casino who is not gambling is the house because they have the probabilities on their side. When I was younger and was planning a trip to Vegas, my Stepfather shared an old saying with me. He said "The only way you can win in Vegas is to get off the plane and walk right in front of the propeller." Note it was propeller and not jet engine. That is how long that saying has been around. I laughed hysterically at that but if you think about it, it makes sense. How many people actually "win" in Vegas? I think you know the answer to that, LOL.
If you or anyone you know is in the home buying or refinancing process, please use or share this information freely. I truly believe people can benefit from this simple rule. Lets face it, getting a mortgage these days is not what it used to and can be a stressful process. The last thing you need is to stay up at night wondering what the rates will do tomorrow and live in panic mode until you lock. Obviously, I highly recommend working with a true mortgage professional who knows what he or she is doing, understands the financial markets, how rates move and keeps you up to date so you can avoid making costly mistakes.
Lastly, I am licensed mortgage professional and have been serving clients, real estate agents and builders in the Greater Triangle area for 20 years. Please feel free to contact me @ 919-614-LOAN if I can be of any assistance at all or answer any questions you may have about this or mortgage financing in general.
**Why do you lose if rates remain the same? Because you have taken on a huge risk with no positive outcome. Taking on a risk and not being rewarded is a losing proposition.