Locking your rate

Most borrowers are faced with the question to lock or float the rate on their mortgage. Today that answer is simple - lock. But why?

With the current rate environment rates have declined to a point where the exposure to a decline is subtle. This means any rate decrease will be over the period of a few days or even weeks, as opposed to a rate increase where rates could rise rapidly. With a rate increase, news and events drive the change and lenders react immediately, causing rates to rise as evidenced in the graph below.

Lenders are efficient in increasing rates in response to news and events and slower to decrease rates in response to market movements. With rates as low as they are today, there is a much higher propensity for rates to rise than there is for rates to fall. If you are evaluating a rate lock with some expectation rates will decline further your risk is higher today than when rates were at 5.50%.

In the below graph we have shown three periods where rates rose quickly. Notice the 14 day moving average is inside a band of 0.20% change when rates fall. That moving average grows dramatically when rates rise.

Click to enlarge image.

 Rate change chart

 

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