March 6, 2015 03:57 AM Eastern
Mortgage Rate Lock Recommendation
March 3, 2015
Lock if closing in 7 days:Rates are down
Lock if closing in 15 days:Rates are down
Lock if closing in 30 days:Rates are down
Lock if closing in 45 days:Rates are down
Lock if closing in 60 days:Rates are up
This is the only day this week that has no pertinent scheduled economic reports. Mortgage rates will largely be influenced by global events and the performance of our stock markets here at home. Currently, the yield on ten-year Treasuries has edged up again to 2.09 percent. Oil is up as well. On the flipside, however, all three major stock indexes are currently down.
CNNMoney's Fear & Greed index is hovering in "Greed" mode. Ity's backed off a bit from last week's "Extreme Greed" readong but is miles ahead of last month's "Extreme Fear" levels. Greed is not good when you're trying to lock a mortgage because investor optimism means more money pours into stock markets and out of bond markets.
Mortgage Rate Basics: Stocks Up, Rates Up
Yes, this is over-simplified for an economics class but it will do here. Interest rates typically rise when the economy is improving. A strengthening economy is a good sign when coming out of a recession or slowdown, but it also triggers concerns about inflation. When investors worry about inflation, bonds and mortgage-backed securities (MBS) become about as popular as paparazzi at an AA meeting.
It makes sense. If you have a bond that pays a four percent interest rate, you'd pay $1,000 for it and get a check for $40 every year. That four percent is called the "coupon rate." The amount of interest you receive each year divided by the amount you pay for the bond gives you the "yield." So $40/$1000 = 4.0 percent. When the yield is equal to the coupon rate, the price you paid for that bond is called "par."
The Stock and Bond Two-step
However, investors buy and sell bonds all the time and often do not get par pricing. When the economy is in bad shape, many investors (like institutions and pension funds in addition to individuals) shun the stock markets in favor of bonds. They just want to park their money somewhere safe until they are comfortable investing more aggressively. The idea isn't to make a pile of money; it's to keep from losing money. So these investors bid up the price of bonds -- it's just supply and demand. And when you pay more for a bond, while getting the same check each year, you're getting a lower yield. So if four percent bonds are now selling for $1,250, the yield becomes 3.2 percent ($40 / $1,250).
And if investors are optimistic about markets, they dump their bonds and hop back into equities. If four percent bonds get unpopular and start selling for $750, their yields increase to 5.3 percent ($40 / $750). That's how rising stock prices cause interest rates to rise, and that's why you need to pay attention to the economy when you're floating a mortgage rate.
"Locking" your mortgage means that you and your lender have agreed on an interest rate and price for your home loan. Once your loan is locked, that's the rate and price you get, regardless of what happens in the financial markets. If rates go up, you're protected but if rates go down, you won't benefit either -- you close your loan at the rate you've locked and you can’t change it. Locks have expiration dates ranging from 30 to 60 days or more, and the longer your lock period, the more it costs. If you don't close your loan on time, you could end up paying a higher interest rate.
You can lock in your loan at any time during the process. Until you lock your interest rate, you are said to be "floating" your mortgage. The only rule is that you have to lock in before you can close on your purchase or refinance.
The decision to lock or float your loan can have a long term impact so it’s important you make the right choice. That’s why we offer a quick rundown of the key factors that drive mortgage rates today and everything you need to know.
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