Ask Money

The mortgage lock-in

Chris Farrell Jun 19, 2009

Question: I am a first time homeowner ready to go ahead with the purchase except for the dreaded “lock” of the interest rate. My closing is set for August 10 so I am still at the 60 day lock rate which today at 4 pm is 5.375%. (Of course, if I was closer to my closing AND I had watched the rates after Obama’s speech this morning, I could have locked in at 5 and 1/8!!) Am I the only one who is not only confused but resentful at just how much of a crap shoot this is? Who has the time or moxy to watch rates minute by minute? All I know is that for me the difference between 5 and 5 375% is $13,000. A lot of money in my book. Will rates come down before my closing? Is there any truth to the rumor that if unemployment rates are up at the end of the month, rates will be lower? Are there indicators that you can watch for? Or should I just resort to an Ouija board or the Psychic Hot Line? HELP! I am an avid listener and look to you for sage advice! Carol, Jordan, MN

Answer: No one knows where interest rates will be come August 10. You can consult an Ouija board, tea leaves, entrails, a psychic hotline, an economist or Wall Street money maven and the value of their prediction will be pretty much the same–not much. The unemployment rate could be higher at the beginning of next month and interest rates could be lower; then again, rates could be higher; and so on. As the movie mogul Samuel Goldwyn once remarked, “Predictions are very difficult to make–especially about the future.”

Here’s the thing: The advantages and disadvantages of a mortgage rate lock-in has nothing to do with forecasting interest rates. It’s a risk management tool. If you lock in current mortgage rates you eliminate the risk that rates will be higher in the beginning of August. The price you pay for that security or promise is this: If rates go down you don’t enjoy the lower rate.

You can’t get rid of the uncertainty about interest rates. What you can do is manage the risk. The question for you then becomes which gamble makes the most financial sense. For most of us, it pays to get rid of the financial danger of rising rates before the closing date. That’s what I would do. But some people are flush enough and have sufficient financial resources that it’s a reasonable not to take the lock-in and bet that rates will be lower in the intervening weeks.

You can learn much more about the costs and benefits of the lock-in at this consumer guide published by HSH here.

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