The 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.