Property ManagementIs it Best to Lock or Float Your Interest Rate?
Question: We are in the process of purchasing a home and we are very close to ratifying a contract. Our settlement wouldn"t be scheduled until 60 days from now but must obtain loan approval in two weeks. We are trying to decide whether we should lock in our interest rate for 60 days or take our chances and float our rate until we are closer to settlement. If interest rates drop by a quarter percent or so, it will add up in the long run. Here"s my question: Since we are 60 days out, is it a good strategy to float our rate under the assumption that rates will fall?
Answer: If rates fall over the next 60 days, it"s a great strategy. If rates rise, it"s a poor strategy.
I know that sounds silly, but it"s true. There are a lot of mortgage advisors who attempt to predict the direction of long-term interest rates, but I simply cannot do it. Unlike short-term rates, which are controlled by the Federal Reserve Board, market forces control long-term rates. And since it"s very difficult to predict the future market demand for long term debt instruments, it will be difficult to predict the direction of mortgage rates.
However, let"s give it a try. Here are a few economic factors that tend to move long-term interest rates:
Inflation. If inflation picks up, long-term interest rates are likely to rise. This is because the value of long-term debt instruments, such as bonds, erodes during inflationary times. So the demand for these instruments will fall, causing the rates to rise.
Economic Growth. Robust growth tends to spur a fear of inflation, so if the economy starts rolling again, mortgage rates could rise.
International Economic Activity. United States Treasury bonds are considered to be the safest investment in the world. An economic crisis in a foreign country has often resulted in a "flight to safety" phenomenon. This means foreign investors snap up Treasury bonds until the crisis is over. The high demand for the bonds will raise the price and lower the yield. Since mortgage rates tend to move in the same direction as Treasury bonds, such an event could result in lower mortgage rates.
Other Unpredictable Events. Lots of things can happen. Another terrorist attack, increased military activity, another Enron-type collapse, etc. Any unforeseen event will affect mortgage rates.
So, what"s going to happen to mortgage rates in the next 60 days? It"s really hard to tell. If the economy doesn"t pick up and inflation stays low, rates will probably stay down. However, a spark in growth may kick rates up a notch.
My advice is this: If you agree with me that predicting the direction of mortgage rates over the next 60 days is virtually impossible, go ahead and lock your rate and be done with it. Your buying a house, not gambling in Las Vegas. Remember, rates are pretty low right now. If you think they may drop further in the months to come, then make sure you lock in a rate with no points. This will keep your costs down so it will be economically viable to refinance if and when rates fall again.