Wednesday, August 25, 2004

Your Mortgage Rate - "Lock" or "Float"?

You found the perfect new home, made an offer that was accepted, and now you've got to get your loan approval in two weeks, maybe less. But, you won't "close" for 60 days or more. Should you "float" your interest rate hoping that rates drop a fraction of a point the nearer you get to close (it'll add up to a tidy savings), or "lock" it now in the belief or fear that rates may rise closer to settlement? We wish we had the answer-- but we can look at key factors that affect mortgage rates for some clues.

Long Term Mortgage Rate Movers & Shakers


    If an inflationary cycle fires up, long-term interest rates are more than likely to rise. Why? Because the value of long-term debt instruments, such as bonds, ebb during inflationary times causing demand to fall, which causes the rates to rise.

    Economic Growth

    Strong healthy growth in the economy results in fear of inflation-- so if the economy starts picking up real steam, mortgage rates could rise as a curbing influence.

    International Economic Activity

    U.S. Treasury bonds have long been considered the safest investment in the world. And so, an economic crisis in a foreign country has often resulted in a "flight to safety" by foreign investors who shelter money in Treasury bonds until the crisis is over. A high demand for the bonds will raises he price and lowers the yield. Mortgage rates tend to move in the same direction as Treasury bonds, so, international economic instability can result in lower mortgage rates.

    Unpredictable Events

    The Presidential elections, the situation in Iraq, the situation in Iran, another state-side terrorist attack, continued lack of confidence in the stock market, natural disasters-- these and many more unexpected events or turns of events will affect long term mortgage rates.

So, what to do? If the future is impossible to predict, probably the best thing to do is go ahead and lock in your interest rate and move on. Rates are still fairly low and have even dropped in the last few weeks from a brief warning uptick-- so maybe now's the time to find a new home and lock your rate. After all, financing a home isn't the time to gamble.