When Do We Lock Our Mortgage Interest Rate?

Dear Money Mentor:

We are pressing to buy our dream home but have been reluctant to lock in our mortgage rate while the rates seem to fluctuate each week, sometimes several times a week.  How do you know when to lock the rate?  We expect to close within ninety days?  Living with our decision for thirty years is intimidating us.  Any insights?

      Indebted for life.

span style="font-weight: bold;">Dear Indebted for Life:

You didn't say, but I assume you are locking in a fixed rate, thirty year mortgage.  A full response of how you know when to lock your rate is beyond the scope of this column.  However, if you watch certain indicators, you can at least make an informed decision.  Will you hit the exact bottom of rate commitment given your ninety day window? Probably pretty close.  Mortgage rates reflect bond rates, because when you create a mortgage someone is going to eventually invest in your mortgage, just as they would an interest bearing bond.  Mortgages cost more than bonds pay because of the added risk and servicing expense.   Point of fact,  many mortgages are placed within days of being originated by your local bank or credit union.  They are pre-sold to lenders/investors.

What do you watch?  Where are bond rates headed?  The downturn in the economy coupled with the terrorist attack encouraged our interest rate money managers to decrease the "fed rates" to forty year lows.  These low rates stimulated the construction and new home industry, as well as encouraging many to re-finance old mortgages above the 5-6% range. If you have been watching the news, you know that the rate has been raised in each meeting of the Fed for several straight quarters, the most recent raise to 5%.  

Is the Fed done raising rates?  No one knows, but inflation hawks are pointing to a number of cost increases in commodities, particularly oil, gas, and related products that would seem to indicate that inflationary costs stimulated by this commodity will be passed along to consumers.  This is a way of warning us that with relatively low national unemployment, a recovery in the stock market, and recent ratification of tax breaks through at least 2010, the Fed may switch priorities from encouraging the economy to grow to reigning in inflation.  The historical pattern to address these concerns is to raise rates.

Seems like a long answer to say, if you are closing within ninety days, there is a strong possibility a further increase in the Fed rate may occur.  In any event there is very little likelihood it will decrease during this period.  Therefore, you may find it wise to tell your banker that you are pre-disposed to contract for a specific rate at the prevailing rate of 6.25%, but that you would like a guarantee that if the rate falls to 6% previous to your closing, you want the lower rate.  Your institution may not give you the option to edge down, but it is a very competitive environment.  If I were borrowing, I would lock the rate sooner rather than later.  But that's only me.  What do I know?

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DPC, your Money Mentor

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