Trying to decide whether to lock in or float? Depends on when you're closing.

I've been right so far, Monday's spike in mbs (drop in rates) has held up. The price of mbs has been in an upward trend cycle since around Mid August. The stock market has been volatile, the bond market has been volatile, hurricanes, energy up and then down, gas/oil is dropping to levels unseen since early spring. Prediction of what is going on within a window of time is very difficult to do right now. We saw bond prices down as much as 28 bp and up as much as 31 bp. That was all just today. The problem is that the markets themselves are hyper reactionary and hyper sensitive. The slightest hint that anything is good or anything is bad, causes a completely unwarranted rush in one direction or the other. It's honestly ridiculous.

Not only have Markets been hyper reactionary and hyper sensitive, but lenders are as well. No one wants to set their rates and then let it ride. This week, would say that at least 5 times a lender reprice notice went out and before the new rates could be posted, bonds would hit a 180 and the new rates were basically worthless. I told you the swing we saw today, we ended the day flat. That's right, down 28bp at one point, up 31bp at others and finished the day at 0bp change. But with a trend in a favorable direction for buyers and refinance applicants, don't just assume you need to lock in right now. However, if any of my borrowers read this, remember, we don't just hang around and hope the rates get better, we lock when we hit our rate. If you're purchasing, you're in a bit different situation, you are at some point going to have to lock, regardless of what is going on or what rates are. What this means is you need to have a long talk with me (or whoever you are using for you mortgage lender) and decide what makes the most sense within the time allotted. Unlike the luxury of letting it float till we get what we need as my refinance borrowers are, the purchase has to get done and locked in at least 3 days or so before the closing.

"Why don't we just lock in, and if rates get better, we get the new rate?" If you owned "Stock ABC" and it was trading today for $50/share. You bought that stock for $20/share. You bought 100 shares so you spent $2,000 on your stock. (We're not going to account for brokerage or transaction fees for our example...no sense in overdoing it.) So you see an opportunity at the $50/share price to make $3,000. Not bad for a days work huh? Everything you and your stock broker have discussed says that this stock is where it's going to settle if not start to go back the other way. In other words, time to take your profit and you're more than happy with a $3,000 turn, you've more than doubled your money! SO you sell it. The day after you sell, any number of possibile market influences start exerting upward pressure on the price of "Stock ABC" and all of a sudden, it's trading at $60/share. Would you call your stock broker and ask him "well since it's selling for $60/share, can you just give me an extra $1,000 so I can have the price that it's getting today?" Of course you wouldn't, it's ridiculous for me to even suggest. You would kick yourself for not waiting another day or you'd say "I should've seen it coming" or something to that effect. But in the end, you'd be happy with it because you got what you agree to get and made an amount of money that was "sufficient" for you to go through with the transaction.

Mortgage backed securities and "locking in rates" are the same thing. Once you've locked in, the bank is committed to give you that rate and you are also committed to take that rate. Everything is a decision based on opportunity cost. Selling my stock at $50/share guarantees me that $3,000 profit. What if market forces played the other hand though? What if I sold it and the next day it dropped to $15/share? All of a sudden my decision to sell the exact same stock at the exact same price because it made sense to me and I was happy with the terms and conditions offered at the time, now looks like the best move I could've made. My opportunity cost of selling was the chance that the stock might continue up and the opportunity cost of holding is the chance that the stock could plummet. So I can make an uncoerced and informed decision based on the information available at the time. I opt that the cost of holding on to the stock is greater than the cost of selling. So I sell the stock and/or lock my rate and then assume that anything that happens from that day forward is completely unrelated to my transaction.

The moral of the story is simple. If what you want and what you are willing to take is there, then take it and there is nothing wrong with making that decision. If rates go down after you lock, shrug it off with "well, it was worth an .125% higher rate because I slept better knowing that it was locked in." Call it an insurance premium. If you decide to float, then don't get upset if it moves either because you opted to see if "better was there" but you have to do it with full knowledge of existing market conditions and at the advice of your mortgage professional. Ask your mortgage lender if they know the following: 1) What are mortgage rates based on? Either they answer mortgage backed securities or you find another lender. 2) What is the next piece of economic news due out that is going to have a rate impact, or potentially have one? They better tell you Friday has a chance to be a big day. (I won't answer the question right now, you have to call me for the answer.) 3) Do you have real time access to mortgage backed securities? If they answer no, or even worse, ask why that would matter. Get up and leave on the spot. I assure you, they are out of their league if they can't answer those 3 questions. Put them against a true mortgage professional and they will lose any day of the week.

That's it for now, I would suggest floating as I have the last three days, but don't be ashamed or scared to go ahead and lock if you're happy with no origination, no discount point and a 6.125% rate on a 30 yr fixed. That's still pretty strong! Let's see what Friday has in store for us and enjoy this time above the 200 day moving average (first time since May) and the upward trend that is managing to chug along in the right direction. Call me if you want more details, always happy to help!