floating 2-1 Buy down Lending ?

[West Kite]

I have a question. If a buyer is offered a 2-1 buydown (starting at 5.25%, increasing to 6.25% and then to 7.25%) with all closing costs covered except for $3,000 (to be paid by the buyer) on new construction through the seller's preferred lender, and signs the purchase contract in April 2024, the house will be completed by the end of September 2024. The buyer was informed that the interest rate will be floating because the construction completion date is further away (5 months) according to the preferred lender. They mentioned that the rate will be higher if locked for 5-6 months. Is this normal in lending? Would you leave it as a floating rate, hoping the rate goes down? Of course, no one knows for sure, but it seems the FED deferred interest rate decreased.

The location of the new construction is so appealing due to being close to downtown (10 minutes).

What would you do?

Thank you for your input in advance.

[Jay Hurst]

Quote from @West Kite:

I have a question. If a buyer is offered a 2-1 buydown (starting at 5.25%, increasing to 6.25% and then to 7.25%) with all closing costs covered except for $3,000 (to be paid by the buyer) on new construction through the seller's preferred lender, and signs the purchase contract in April 2024, the house will be completed by the end of September 2024. The buyer was informed that the interest rate will be floating because the construction completion date is further away (5 months) according to the preferred lender. They mentioned that the rate will be higher if locked for 5-6 months. Is this normal in lending? Would you leave it as a floating rate, hoping the rate goes down? Of course, no one knows for sure, but it seems the FED deferred interest rate decreased.

The location of the new construction is so appealing due to being close to downtown (10 minutes).

What would you do?

Thank you for your input in advance.

 Yes, a 5 month rate lock is going to cost more then say a 30 day rate lock. But, to make a decision you would to know what the cost is. 

[West Kite]

Jay, thank you for responding. I know it could be a silly question, predicting future interest rates. I have been monitoring the Fed's statements regarding the possibility of rate cuts this year, but it seems to have been deferred, or who knows. Would it be better to choose a floating rate, hoping rates will go down? What would you suggest to your family in this regard? :)

[Jacopo Iasiello]

While no one can predict the future with certainty, if rates are expected to rise significantly in the coming months, it might be wise to lock in the rate now to secure a lower rate. Take a look at current interest rate trends and forecasts.

[Jay Hurst]

Quote from @West Kite:

Jay, thank you for responding. I know it could be a silly question, predicting future interest rates. I have been monitoring the Fed's statements regarding the possibility of rate cuts this year, but it seems to have been deferred, or who knows. Would it be better to choose a floating rate, hoping rates will go down? What would you suggest to your family in this regard? :)

 what are they quoting you for the 5 month lock?  You need that data point. 

[West Kite]

Hello Jacopo, Thank you for your input. Could you suggest some reliable websites to keep an eye on current interest rate trends and forecasts? Where do you usually monitor this? Thanks

[West Kite]

Jay, I am still waiting for information from the loan officer. I know no one can predict future rates, but what are your predictions from your standpoint?

[Doug Smith]

Quote from @West Kite:

Hello Jacopo, Thank you for your input. Could you suggest some reliable websites to keep an eye on current interest rate trends and forecasts? Where do you usually monitor this? Thanks

 I own a mortgage company in Florida. I watch the 10-Year Treasury constantly as that will track in lock-step with mortgage rates, but you can always download "Mortgage News Daily" from your Ap Store. That rate is going to be a "national average"...not the rate that all lenders will offer. Rates are going to have "loan-level pricing adjustments" (LLPAs) that will have different rates depending upon Loan-to-Values, Credit Scores, Property Type, and many other factors. Also, keep in mind that although most lenders start with similar "Costs of Funds", we all have different "spreads", or "mark-ups" built into the pricing. I would be a bit apprehensive about locking that far out. The premium you would have to pay for a lock is going to be like a whip. The farther you get away from your hand, the more the whip moves. Similarly, the farther out you lock, the bigger the premium that is built in. I would think it would eat up a big chunk if not all of your buy-down. The other thing to keep in mind with new construction is this...does the builder own the lender? Big builders will build in tons to the price of the house to offer "closing cost concessions" or buy downs. They also don't use standard contracts. They have their attorney's draft them and they stack many of the fees that the seller would normally pay and push them off onto the buyer. The builder-owned lenders usually have higher spreads built in as well. Personally, that far out I would float. I don't think the lock premium will be worth it until you get within 45 days or so. Good luck. 

[West Kite]

Hi Doug, Thank you for taking the time to thoroughly provide information, and the website 'Mortgage News Daily' is very helpful. I have been monitoring FOMC meetings, and it seems the rate cut will be deferred (even though no one knows for certain). It makes sense that the lock premium will not be worth it if it's too far out for float the rate. Thank you again.