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Locking Strategies
There are two distinct groups of mortgage applicants considering the opportunity to lock in an interest rate. Group one: "Rates are so low that I can't imagine missing the opportunity to lock. Please lock me at once at the best you can get."
Group two: "Rates are so low that I can't imagine missing the next new low. If it goes back to 7.75%, I don't care. We'll float with the market."
There are other groups, of course, led by the chronically undecided, who are beyond help.
The following are some general ideas about how to play the when-to-lock game.
Nintendo. Mortgage prices move real time with the bond market, meaning they can change during each day, sometimes more than once. If they go the wrong way while you are thinking it over, too late.
Shouldn't you always lock? That's what pessimists say, but just about any time in the last three years was a good time to float. During that period, rates popped up only twice: from 8.25% to 9.00% in January 1992, and from 8.25% to 8.75% during the "Clinton Scare" in October 1992.
All other times, floaters made money, sometimes a lot.
How to win. Play trend. In a general drop in rates, float; in a general rise, lock. That was hard, wasn't it?
Play extremes. At some moments in a rising market you can save money by floating, or lose money by floating in a falling market. When rates have moved sharply -- either way -- by a half percent or more, bet against a continuing trend. Extremes correct themselves in the short run.
Play news. Interest rates make their biggest moves in response to surprising economic news. While floating, be aware of dates of significant news releases.
If you play news, play it straight. People floating rates have an astounding knack for finding news stories and analysis which say that rates are about to drop. Bad news is invisible to these readers: self-deception is common when there are large sums of money nearby.
Assess your worst risk: your own feelings. The lock vs. float game can be boiled down to basics. If you lock, the only bad thing that can happen to you is a drop in rates. If you float, the only harm comes from a rise. Balance how you will feel missing lower versus getting higher: if vulnerability feels worse than missed opportunity, lock. Vice-versa, float.
Leaving town. Don't leave town without leaving locking instructions behind.
Cheops' Law. "Nothing gets built on time or within budget." If you are building a house, do not try to lock far in advance of completion unless rates are in a strong rising trend. If the house is late, your lock will expire together with the fees you paid to get a long term commitment.
How wrong can I be? Normal day to day trading moves rates less than an eighth of a percent: 7.00% at zero plus a quarter origination might go down to zero and zero, or up to zero plus three-quarters, but still 7.00%.
On a bad day, 7.00% might move up to 7.125% or 7.25% in one jump. On a really bad day, 7.00% might go all the way to 7.5% (a day that bad happens only once every couple of years).
On the once a decade bad day (or three day in a row), there is no market: "Due to market volatility, we are not accepting lock today." See October 1979 and April 1987. By the time you are able to lock in, 7.00% might turn into 9.00%.
Vegas. Floating is a lot like gambling, but the odds are better, However, as in gambling, be aggressive when you are playing with the house's money, and set a loss limit. If you float, and rates drop, it can cost you only your winnings to float some more, Be sure about the loss limit: set a rate at which you will lock for sure if you were wrong.
Can you afford to be wrong? If you won't qualify at a higher rate than current market, you can't afford to float at all.
The absolute worst possible strategy. The banker says to the borrower, "Today we can swing 7.125% at zero and zero. Rates have been bouncing between 7.00% and 7.25%, and the dead rock bottom two weeks ago was 6.875%. What do you want to do?"
Borrower says, "Lock me when it gets back to 6.875%."
If you are going to float, float. If you are going to float for a new low, do that,
But don't ever, ever, ever set your "take" rate just under the current market, particularly at the old new low, which may not be seen again for fifteen years or so.
Don't nibble at the market, expecting it to accommodate your wish for round numbers, or convenient level. Decide on a strategy, and keep it.
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