Locking in Your Rate in a Time of Extreme Volatility

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by Kabir Mahadeva
on Monday, July 13, 2009

In the last several weeks, loan rates have changed between .125 and .5% in a matter of hours. The mortgage bond market has never been so volatile before, and rarely has anyone been able to predict the moves with any certainty. Now, more than ever, I advise my clients to lock.

When advising a borrower about locking or not locking, I have stopped trying to time the market, because it ends up causing heartache nearly every time. Just ask the people who floated their loans on May 27 only to see rates skyrocket the very next day because the experts called it wrong on the jobs report.

I now tell my clients, "You always save time and money if you lock. If rates go up, you're protected. If rates go down far enough prior to closing, most lenders will allow you some leeway to renegotiate the rate. If rates stay the same, you saved time and stress dealing with the market volatility."

A note about renegotiation here: most lenders will not renegotiate unless rates move about .25-.375% lower. And a successful renegotiation will probably yield a rate somewhere between the current rate and the locked rate. For example, if you lock in today at 5.5%, and rates go down to 5.125%, you may be able to renegotiate a new rate of 5.25% or 5.375%.

Also, people holding out for a .125% difference in rate often fail to realize that it makes a very small difference in a monthly payment, about $8 per month on a $100,000.00 loan.

But if people don't want to lock, I tell them, "You lose time or money 2/3 of the time when you float. If rates go up, you pay more. If rates stay the same, you've had more than a few nerve-wracking moments with today's market volatilty. You only win if rates go down, and lately that's not been happening."

Mortgage bond prices move in the opposite direction from rates, and are affected by many macroeconomic and political factors. Lately, to use a mountaineering analogy, prices drop off a cliff, but climb back up a mountain of sand. Translating this to rates, they go up fast but go down slowly.

Most people do not have the time nor the desire to become experts in the mortgage bond market and the many factors that affect it. While technical trend analysis can help in short term decision making, unexpected economic or political news can tip the scales suddenly and without warning, as we have seen in the past few weeks. Even routine news, such as the size of government borrowing (i.e. upcoming Treasury auctions) can affect rates.

Government intervention in the mortgage market is still keeping rates substantially lower than they would be without the intervention. This purchasing by the Fed will eventually stop when the money runs out, and then we will see substantially higher rates down the road. The refi boom is mostly over, though some of the fence sitters hoping for the 4.5% rates are now embracing reality and may settle for a higher rate while still saving money.

If borrowers want to win 100% of the time, we will advise them to lock when they can.

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About the Author - Kabir Mahadeva

Contact Kabir Mahadeva:
Waterfield Mortgage a division of Waterfield Bank
828-552-0330
kabir@ieee.org
www.wncloan.com

Learn more about Kabir.