With the markets so volatile is it wise to lock or kind of just float until closing.

This question was asked in the comments section of my last blog, I thought it was a good question and I wanted to get a little deeper on my answer.

With the market as volatile as it is my opinion is that the decision has far less to do with what is happening in the market and far more to do with your tolerance for a change in the rate for either the better or the worse.  We are in completely uncharted waters and no one knows for sure what will happen with rates.  I read some “Expert” analysis:

“Should the Fed choose to remain mum on plans to officially enter the long-term government debt market as a buyer– look for a big sell-off in the government debt market to develop which by extension will almost certainly cause mortgage interest rates to sling-shot higher.”

On another site:

“Down in Coupon Rally in the TBA MBS market….reprices for the better have been reported. More should be on the way….”

Both of these quotes were pulled from analysis today!  You have to wonder how can so called Expert analysis be so different.  Even more confusing, both may be correct!  Should…Almost certainly… means that although this is what they expect…it might not happen! 

The uncertainty is what you have to keep in mind when reading the analysis.  The second quote was talking about the market’s actual movement today the previous was/is trying to gauge what will happen with rates after the fed meeting finishes up. 

Rates are slightly improved today the 4% coupon closed up 9/32nds at 100.187 that is actually down from the high of the day of up 16/32nds at 100.42.  Better than the start of the day but some of today’s improvements have already been lost and will likely be a factor in rates tomorrow.  Of course the MBS market is continually changing.  What that means is that the market could move first thing in the morning for better or worse and no one knows for sure what that will mean for rates.

Knowing all this…Should you float or lock?

It comes down to your tolerance…

All you know is what rate you can get today..at this moment.  Let’s say that rate is 5.125% and you are looking to borrow $100,000 rounded up that P&I payment will be $545.  What could happen….

Rates improve by:

.125% payment $537

.25% payment $530

.375% payment $522

or Rates get worse by:

.125% payment $553

.25% payment $560

.375% payment $568

What will be less tolerable?

1. Not catching the absolute bottom.
2. Having to pay more than you could have paid today.

If you answer that question by saying not catching the absolute bottom would be worse.  Then float your rate..If that’s your choice keep in mind you may have already missed the bottom or could miss the bottom waiting for it to drop further.

If your answer to that question is you will be more upset if you end up paying more than you would if you locked in today. Then Lock your rate.. if that’s your choice keep in mind that you have chosen to lock your rate and if rates improved do not expect you will be given the better rate.

You only can decide if a decision is right or wrong in hindsight and that’s just not an option.  You could make the “right call” and still not end up with the lowest rate.

I kind of think of it like playing black jack.  You can be looking at 9 against a dealer 6…I would choose to double down.  Anyone that plays black jack will tell you it’s the right call.  You double your bet and pull a 6 and end up with 15.  Dealer turns his under card over and  has 10 hits and ends up with 21…you end up loosing twice your initial bet…you didn’t do anything wrong!  in hindsight you wouldn’t have doubled your bet…But that’s not how they play the game and you have to live with your decision. 

January 27, 2009