When to Lock Part 1: Timing Your Decision

May 24, 2010


locked-chain-sqThe rate lock conundrum is the basis of angst for every borrower that I have ever had. After all, this is a choice that is going to have an effect on your finances for a considerable amount of time. On the one hand, there is desire to secure the best possible rate, which requires exposure to risk in an effort to time the market perfectly. On the other hand, there is the desire to eliminate uncertainty by simply choosing a rate that you can afford to ensure the viability of your transaction. This may initially seem impossible. When you understand how the market determines rates, however, you can strike the needed balance between these opposing requirements and secure a favorable rate.

The main indicator for mortgage rates is the bond market. As money moves into the bond market, mortgage-backed securities (bundles of loan sold on the secondary market) become more attractive. The yield required for buyers of these securities drops and the rates drop as well. This is an oversimplification, but it will do fine for you to grasp the concept. If conventional wisdom is pointing to a rough patch in the stock market, you would be best served by waiting. Conversely, if it looks as if the bond market is headed for a dip, you should lock.

It is important to remember that this analysis is not an exact science. You can read the tea leaves and come up with a good idea of where the market is headed, but nobody knows exactly what is going to happen. The securities and bond markets are fluid. There is a continual stream of good and bad data that contributes to the ups and downs in equities and bonds. While you can often track trends and anticipate outcomes, there is no way to know for sure whether a particular economic indicator or the earnings of specific Wall Street bellwethers will be positive or negative. You will not likely be able to predict the exact bottom of a cycle, so it is a fool’s folly to try.

So, there you have it, knowing when to lock is a process, not a point in time. Like researching routes and printing out maps in preparation for a car trip, a little preparation and knowledge goes a long way. And like a car trip, where you can get to the most efficient route by constantly reading the signs and conditions on the ground, you can empower yourself to make the right decisions by applying the same approach to the financial markets. If you do this, you will, no doubt, secure a very good rate content that you choice to lock was a sound and educated one.

Keep an eye out for my second part in this series, which will address the lock period and how it should influence your decision.

We would like to thank Bala for kindly sharing today’s photo via the Creative Common’s License.
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About Doug Katz

As the Senior Mortgage Banker and Sales Manager for Chicago Bancorp, Doug not only originates loans for his personal business, but also oversees affiliations with banks and other financial institutions that depend on Chicago Bancorp to meet their client’s lending needs. In this role, Doug directs the day-to-day mortgage sales operations of over 25 branches in a multitude of Chicagoland’s diverse communities. He brings to these relationships a wealth of industry experience and a dedication to an exceptional client experience that has established Chicago Bancorp as Chicago’s pre-eminent mortgage solution providers. Prior to joining Chicago Bancorp, Doug attended and graduated from West Point. Upon graduation, he was commissioned as an officer in the United States Army Artillery, where served 5 years in numerous roles and in various deployments include service in Kuwait. In addition to his Bachelor’s Degree from West Point, Doug holds an M.B.A. from Loyola University Chicago, where he was also inducted into the Beta Gamma Sigma Honor Society. He also served as President for the West Point Society of Chicago from 2003 to 2005 and still serves on the Board of Directors. When not working, he spends his time with his wife and three children in their hometown of Oak Park, as well as pursuing his passions for fitness, cooking and the banjo. Doug can be reached by phone at 312.738.6079, by email at doug@chicagobancorp.com, on his own blogs, BankerDoug.com and Vet Money Matters. He's also on LinkedIn.

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