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Keep Your Hopes Up, Down, Whatever
A home buyer has decided to float the interest rate on his loan, hoping for better before closing.
An otherwise steady sort, for whom ten minutes on a nickel slot had been the lifetime gambling experience, he is increasingly nervous. More than that: no-pants embarrassment alternating with pending doom. His father told him he couldn't afford a new home at any interest rate; his brother-in-law, the stockbroker, told him to lock weeks ago; his nine-year old says he should be watching the net; and his wife no longer wishes to discuss the subject.
He places a Monday call to his mortgage banker. "How are rates today?"
His banker is used to worried calls: rates, appraisals, approvals, closings; disasters apparent and real, her fault, their fault, nobody's fault. She shows care to all, aware of the fantastic stress carried by most home buyers.
This particular Monday the banker is fielding a lot of calls, and -- not thinking, for just an instant -- she answers our anxious friend, "The market is way up today."
Even a fine mind will crack under enough stress.
"WHAT!"
She knows what she has done, tries toÉ "It's okay, I meantÉ." Too late.
"HOW FAR!?"
"The bond market is up, but rates are downÉ"
"Eight, right? I knew itÉ nine? Answer me!"
Now the banker is raising her voice: "Rates are down, not up; bonds are upÉ."
"We're not buying the house. Stop everything."
It can take a while to sort out a conversation that starts this way. Why, the recriminations alone can take half an hour. After going through a couple of dozen exchanges like this, most mortgage bankers take a vow to rehearse terminology with buyers. "I swear, on my wife/husband/car phone/children, never ever ever ever to mention the words 'up' and 'down'; interest rates are 'better' or 'worse'."
As most sophisticated borrowers have figured out, "up" to a bond trader means bonds have risen in value, and rates have fallen, while "down" means bond values have fallen, and rates are up.
However, even the sophisticated lose it under enough pressure. People try to memorize the financial mantra: "Bond prices and yields move in opposite directions", but under stress, you might as well try to remember your husband's cutesy password for the security system.
One approach that seems to help clients engrave these ups and downs in useful memory is this reminder: all modern mortgages go into the financial markets. Think of your mutual funds: which is better, up or down?
Or this one: you are going to sell your loan to a banker, who will sell it to Wall Street. You want for anything you sell to have the greatest market value possible. On the Street, "up" is good.
Which leads to another matter of perpetual confusion: value, like rates, is measured in partial percentages. Most mortgage interest rates are quoted in eighths of a percent, and a change of an eighth can be real money: on a good sized loan, maybe twenty bucks a month for a long time.
Changes in loan value are measured in "points", and in a competitive market, as little as eighths of a point: "Today, we're charging only three-eighths origination fee at seven and an eighth."
Perhaps you can see this one coming. Or have participated. Assume rates were 7.625% at "zero and zero" the last time buyer and banker chatted.
"How are rates today?"
Vow-taking banker: "Oh, about three-eighths worse."
"That means we're at eight! Ohmigod. We can't buy the house." A recurring theme, there.
"No-no-no-NO! Three eighths in point, not rate; we haven't even gone up to 7.75%."
"Well, why didn't you say so."
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