When purchasing or refinancing a home in Phoenix, one of the most difficult decisions you will have to make is whether to lock in your interest rate or let it float. For first-time homebuyers or borrowers that are less familiar with the process, here is a brief description of the terms. "Locking" an interest rate means finalizing a rate commitment with the lender that a specific interest rate will be held for you, at a certain price, for a specified period of time. At that time, you are guaranteed that interest rate regardless of whether the market improves or declines. The standard time periods for interest rate locks range from 15-60 days; however certain loan products and programs may carry different options. The alternative option is referred to as "Floating". This simply means that you are waiting to see what daily impact the market may have on mortgage rates until you decide to lock your rate. Borrowers typically utilize this option in an attempt to reap the rewards if there is an improvement in the market; however this also leaves the borrower vulnerable to potential downturns as well.
In a market when rates are either steadily increasing or decreasing, this decision is a little more apparent. However, in an economy where mortgage rates and other factors driving the market are extremely volatile, the decision is much more difficult.
It is a common misconception that when the Federal Reserve implements a rate cut that it is immediately correlated to a reduction in mortgage rates. While the federal funds rate contributes to the movement in mortgage rates, the two are not directly related. In fact, mortgage rates are based on mortgage backed securities or bonds and are strongly correlated with yields on the 10-Year Treasury note. Bond sales prices are similar to that of a stock in that they fluctuate continuously through any given trading day. Bonds are largely affected by various economic forces that influence the ever changing demand for bonds within the market. Each week various economic reports are released that influence the movement within the bond markets. Some of the key economic factors that have the greatest impact are unemployment percentages, inflationary fears, economic strength and the overall movement of money in and out of the markets. Like stocks, most fluctuation is caused by consumer and investor emotions.
Typically, if the demand for bonds is high then mortgage rates will go down. Conversely, if bond sales are down then interest rates tend to go up. A few quick tips that highlight the probable movement in mortgage rates based upon various changes in the market are as follows:
•· Release of Good Economic News - Increase in Mortgage Rates
•· Release of Bad Economic News - Decrease in Mortgage Rates
•· Increase in Stock Market - Increase in Mortgage Rates
•· Decrease/Correction in Stock Market - Decrease in Mortgage Rates
It is not unlikely for mortgage rates to change more than once in a given day. Unfortunately, investors are much quicker to re-price mortgage rates for the worse than they are to increase them in a positive direction for the borrowers.
The critical elements in deciding whether to lock or float are not only understanding what causes mortgage rates to fluctuate, but also paying close attention to the key economic indicators that determine this behavior to ensure you are able to react in a timely manner. In order to better assist my clients make an educated and informed decision, I post a daily blog entitled "FLOAT OR LOCK? Daily Phoenix Interest Rate Update and Recommendation". Here, borrowers can find daily summarized updates of market conditions and other economic news that directly impact mortgage rates. This article also provides a recommendation based upon the prevailing market conditions.