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The rate sheet on the previous page was incomplete. Time
is a factor in pricing interest rates, too. Because
interest rates change daily (and sometimes during the day)
the longer a lender locks in a rate, the more risk that they
have the market will move against them. Therefore, you
pay more (in points) for a longer guarantee.
If interest rates are trending up, it makes sense to lock
in your rate. If interest rates are trending down, it
makes sense to "float" your interest rate so that
you can take advantage of a shorter lock-in period. When
rates are fairly stable, it also makes sense to "float" your
loan to take advantage of a lower price for a shorter lock-in.
Rates |
15 Days |
30 Days |
45 Days |
6.250% |
2.000
|
2.125
|
2.250
|
6.375%
|
1.500
|
1.625
|
1.750
|
6.500% |
1.000
|
1.250
|
1.375
|
6.625% |
0.500
|
.625
|
.875
|
6.750% |
0.000
|
.250
|
.375
|
6.875%
|
(.500)
|
(.250)
|
(.125)
|
7.000% |
(1.000)
|
(.750)
|
(.500)
|
7.125% |
(1.500) |
(1.250)
|
(1.000)
|
7.250%
|
(1.875)
|
(1.625)
|
(1.375)
|
7.375%
|
(2.125)
|
(2.000)
|
(1.750)
|
7.500% |
(2.375)
|
(2.250) |
(2.000) |
Even when it is easy to predict a trend in interest rates,
choosing not to lock in is a risk. That is because,
even in the middle of a trend, the daily fluctuations of
interest rates can be extremely volatile. Daily economic
news affects interest rates, sometimes dramatically.
For example, if more new jobs were created in the previous
month than the prognosticators expected, that could indicate
the economy is speeding up faster than expected, which could
be inflationary. Interest rate markets fear inflation. The
day new employment figures are announced (the first Friday
of each month) rates could swing wildly to the up side. A
few days later the Purchasing Managers Index might show a
smaller number than expected and rates will fall again.
You may reach a day when you have to lock
in -- because you cannot draw the loan documents without
locking in a rate. That
might be a day when rates are up, even though they are trending
downward. Locking in your rate provides a nice safe
guarantee -- providing you close on time. It makes sense
to build in a cushion because no one can guarantee you will
close on time, even though everyone tries their best.
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copyright 2000 by Terry Light and
RealEstate ABC
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