LOCK your mortgage interest rate
Rhonda Porter on 06 7, 2007
[photopress:MPPH02810J0000_1_.jpg,thumb,alignright]Mortgage interest rates continue to move upwards. The latest factor is across the globe in New Zealand. New Zealand’s Central Bank (like our Fed) hiked their interest rates this morning…so how does something so far away from the USA impact our mortgage rates?
Remember, mortgage interest rates are based on mortgage backed securities: bonds. These bonds are traded just like how stocks are bought and sold. So if an investor can get a better return in New Zealand vs. here…then that’s where the money may go. Out of bonds and into kiwis thus pushing up mortgage interest rates. In addition, other countries, such as Australia may follow suit increasing competition for international dollars even higher.
It has never been my practice to “float” a loan. Once we have a purchase and sale agreement with a closing date, I always encourage clients to lock. The risk is far too great to float. Trying to capture that 0.125% better may cost you and those who have been playing the float game to gain a bit more have just lost.
If you currently have a transaction in progress, I encourage you to contact your Mortgage Professional to confirm that your loan is locked. Better to be safe than sorry.
About the Author: Rhonda Porter
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25 Responses to “LOCK your mortgage interest rate”
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Rhonda is absolutely dead-on correct.
Anyone trying to scalp a .125% in this market is seriously whacked. The 10 year bond yield is almost up 1/8 of a point in the first half of this morning alone! The past three weeks has been a parabolic ascent, and the 10 year is the doo-dad that most closely influences the mortgage interest rate.
http://finance.yahoo.com/q/bc?s=%5ETNX&t=5d
Don’t click that link if you have a heart condition.
With the Kiwi CB raising rates, Europe doing the same, the Canuck-buck almost on par with the US Peso (up from 62 cents just a few years ago), and the Yen carry trade telegraphing to the outer limits of the universe that it is about to unwind, the FED is going to abandon any hopes of cutting rates anytime soon.
If they cut, the dollar gets crushed. If they hike, the economy (re: housing) gets disemboweled, and the stock market trades back into the mid 4 digits.
Panic now and beat the rush.
This story has been on-going and it’s a shame that ordinary homeowners have to read blogs to find out.
I am sure there’s more than one home buyer out there whose prequalification letter is no longer valid.
Very true, Dan. Or if the home buyer was going to utilize a 30 year fixed, they may need to switch to a fixed period ARM. Consumers, in general, are very casual about their mortgage when it really is a financial plannning tool. Which as a fellow CMPSs, YOU very well know.
Your blog is outstanding and has been a great tool for ordinary home owners and our industry.
Why not advise people to wait until rates drop? With the way bond yields have see-sawed over the past year what’s to say this up cycle isn’t going to be heading back down within the next 45 days?
Bill,
It sounds like you have been watching the oscillations on the TNX. Have you watched what happens to the equity markets about 3-4 weeks after the TNX climbs above 48ish?
This could be an exciting few weeks.
If we make a new relative high and exceed 53, it is going to be fugly.
E
Bill,
First of all, I’m not sure when rates will drop. What if I told someone to float and then 45 days later, when it’s time to close their transaction, the rates are 0.25 – 0.50 higher and they either no longer qualify for the mortgage, as Dan referenced above–or they’re very unhappy with their rate.
My hunch is that rates are going to continue on this trend for a while based on inflation concerns and the economy.
Locking your rate is having “assurance” that the rate will not be higher at closing. It is the consumers choice. Again, I do not advise floating–especially in this market.
[...] Remember, mortgage interest rates are based on mortgage backed securities: bonds. These bonds are traded just like how stocks are bought and sold. So if an investor can get a better return in New Zealand vs. here…then that’s where the money may go. Out of bonds and into kiwis thus pushing up mortgage interest rates. In addition, other countries, such as Australia may follow suit increasing competition for international dollars even higher. Read More [...]
Rhonda: Would a comparision of last year and this year give a better answer to Bill’s question? Last year too rates spiked in summer, and came back down end of the year. Last year too inflation was a concern. Why did it come down to the end of the yr?
NZ is a pretty small country. The entire GDP is about 1/3 the market CAP of Microsoft! Maybe there is some speculative element at work in the sheep & fruit futures market. Looking back at what happened to the Icelandic bond market last year, rates had edged up close to 10% just weeks before their currency collapsed, wiping out any gains from the high yield. Granted, NZ’s economy is 10 times the size of Iceland, but it’s still a minor player even within the SE-Asia region. Nice place though.
Sandy. I don’t think so (to answer your question). There are many factors that influence mortgage interest rates as they are traded. It’s not based on investors saying “hmmm…lets lower rates because it’s the end of the year”. Inflation and the economy are huge influences on mortgage interest rates.
I’m referring to Mortgage Market Guide’s history of the 30 year fixed with regards to the following:
June 2006: 6.68% Dec 2006: 6.14% (decrease)
June 2005: 5.58% Dec 2005: 6.27% (increase)
June 2004: 6.29% Dec 2004: 5.75% (decrease)
June 2003: 5.23% Dec 2003: 5.88% (increase)
Again, if you want to float…knock your socks off. I don’t advise it.
Bill, other countries, such as Australia (slightly larger than NZ) are expected to possibly follow. The markets just need “speculation” to react.
I encourage clients to lock even when we’re not in a market of rising rates. Otherwise, they’re gambling. Again, it is the clients choice. It’s my job, if we’re working together, to provide my opinion.
Sandy and Bill,
Dan Green at The Mortgage Reports has a great post on why you should lock and not float. I highly encourage you to check it out.
I think the RBNZ is not big enough to absorb enough money to cause a selloff, but it shows what a responsible CB will do to keep inflation in check. One thing Dr. Alan Bollard was concerned about was the rapidly rising cost of food. Apparently, food is important to those down under, unlike here in the US.
Meanwhile, here in the world’s largest Banana Republic (a statement of Washington graft – not recent immigrants – so just calm down!), our panglossian FED specifically ignores food and energy when making decisions about the relative strength of the US Peso. That is why they can, with a straight face, say that inflation is 2.2%, when it is probably 10% +/-.
We have not seen an example of a responsible CB in the US or Japan since the mid-80s, so looking to a small Antipodean CB for leadership examples is significant. As other CBs get the courage to decouple from the FED, we will see a global shift away from US denominated assets.
BTW, has anyone been watching how many oil states are decoupling their currency from the US? For those of you who are not Amish, that is a significant development.
51 on the TNX today. People will be icing themselves down after that is digested.
There is not a shred of doubt regarding locking mortgage rates down. The part where we all gamble I guess is questioning whether it is worth paying closing costs or just take a higher rate and re-fi sooner than your break even point if you had paid closing costs.
Now given the current market, yeah sure seems like the lower rate is the better option. From where I see it though, if the mortgage rates really continue to rise, the slow decline in home sales will accelerate and spill over into the rest of the economy. I am already suspecting that later this year the economic growth is really going to be poor.
I also think if the economy slows down (jobs addition) and if rates go up further, the local real estate market will start seeing declines too.
Anyways, as for me, I value peace of mind more with a lower rate. Thoughts?
Sandy,
Since I don’t know all of your financial details and goals, it’s difficult for me to provide you any advice. I do know that unless I had a client who was not planning on keeping their home long, or if they were planning on refinancing for what ever reason, then I might consider advising pricing a loan with no closing costs. I would NOT advise a client to go no cost on a mortgage (much higher rate) and tell the client that rates will be lower in 6 months and we’ll refi then. I try to set up a mortgage so that a client DOES NOT need to refinance…ideally.
I don’t know your plan or your LOs strategy so it is hard for me to relate.
I’m glad you’re asking questions and being responsible trying to find information.
Bottom line, it is your choice on how your mortgage is priced and structured. Are you closing on your transaction any time soon?
Now Bill Gross has come out and said “Hey, I have changed my mind, rates are going up up up over the next 12-18 months” I’m thinking that this time may be different. He’s predicting 10-yr at 6.5% and mortgage rates in the high 7’s. This from a guy that is perpetually bullish on bond prices. Didn’t expect that from him.
Do you want to float a rate lock now, Bill?
One of the lenders I work with issued 4 rate changes today…others were 2-3.
Dustin,
BTW, I am very impressed that you can make it where I can see my posts, but nobody else can.
This is the cyber version of “if a tree falls in the woods, but nobody is there to hear it…”
Very cool (and petty),
E
Eleua, when your response to being told your comments were inappropriate was to defend the comments using the same derogatory terms, I felt the need to moderate your stuff for a little while… Sorry if you feel it is petty, but it is my solution to ensuring that the other people who are writing posts and leaving comments still feel comfortable taking part in the RCG community.
Rhonda, yeah, I’m certainly in favor of locking rates. What I was getting at was whether your recommendation had more to do with your insight into future rate trends or getting people off the fence and to your desk. I find this sharp spike over the last few weeks surprising but not unexpected since over time money rarely stays this cheap for this long.
I think rates will continue to trend upwards. My gut hurts when I work with “floaters”…it makes me a nervous wreck…but as I mentioned, it is the consumers choice.
[...] Friday’s Rates continuing up June 8, 2007 What happened yesterday that caused me to issue an Alert to Lock? New Zealand raised their interest rates unexpectedly due to their improving economy and to hedge inflation causing quite a reaction from investors and significant increases to mortgage interest rates (bonds) throughout the day. Conforming rates are up 0.25% from last Friday’s rate quote. [...]
[...] The closing costs appear to be in line…however, the estimate is dated June 4. This is just about when rates began to trend higher. The rate on the estimate is no longer valid. A lot has happened with interest rates over the past six weeks! [...]
A couple newbie home buyer questions:
You have to have a property that you are in contract in to lock your rate, right? If you are just shopping, you can’t lock the rate?
Is a home buyer more “committed” to using a particular mortgage broker if he chooses to lock the rate with him, versus floating it?
Is there a difference in how mortgage brokers are compensated for locked vs floated loans?
How can a home buyer confirm that your locked rate has continuous floatdowns – is it a standard part of the written lock confirmation that the LO provides?
On another note, I’d love to see a post on LO compensation from you, including an opinion on Upfront Mortgage Brokers.
Hi Jenny, I would love to do a post on that for you. A quick answer is that mortgage brokers are not paid unless your loan closes. You can have a locked loan and for some reason the transaction doesn’t close and then…no matter how many hours you and the mortgage person have invested in each other, they are not compensated.
I’m not a member of the Upfront Mortgage Brokers. I don’t believe I need to pay someone a couple hundred dollars to belong to something only to say “I’m a UMB”. My business model is to be “transparent”…sometimes, I think it’s more than what some people would like!
Your questions are great and I’ll work on the post for you. If any UMB wants to add their 2cents once it’s posted in the comments, that would be great!