Archive | September 2013

When Should I Lock My Interest Rate?

One of the most common questions that I get from clients is when should I lock my interest rate.  My answer tends to be pretty consistent.  I almost always advise clients that as long as they are comfortable with the payment at the time that they apply, they should lock in their interest rate.  While everyone wants to lock in when rates hit their bottom, few people ever do. The lowest rates any cycle tend to last for a day or sometimes only hours.  Trying to get the lowest rate in any given cycle can be as much about luck as it is about skilled advice.

The reasons to lock in early are plenty, but chief among them is this;  you’re buying a home that you are going to be paying for over a period of up to 30 years.  Making sure that you are comfortable with your payment is a key piece of creating financial security for yourself.  By locking in a rate at application you are ensuring that you won’t need to start stretching your budget beyond what you had in mind.

When making a decision, it’s also important to know that rates tend to rise more rapidly than they decline.  While news that is considered beneficial to rate markets can have a positive impact on interest rates, price improvements tend to occur over days or even weeks.  When their is negative news for bonds, the effects can be instantaneous.  Consider that when the Fed met in June and announced plans to taper off their stimulus program bonds were up almost 1/2% overnight and a full percent over the next week.  Last week, the Fed announced that they will not immediately start tapering as people had though, and the positive effect on the retail rate market was only about 1/8% overnight, and in the week since, the total price improvement has been about 1/4% to most fixed rate products.

Additionally, given the right circumstances a locked rate doesn’t mean that you can’t take advantage of a falling rate environment.  Many lenders offer what’s called a “float down” option, allowing you to take advantage of any sharp decline in rates that may happen during your transaction.  These options usually require that the market move by at least 1/4% and may have fees associated with their execution, but they can be a great way of giving yourself peace of mind while still allowing you to try to reap some benefits if pricing moves the right way.   Asking your loan officer whether or not your interest rate can be floated down is always a good idea.

Finally, if there is no float down option, you still haven’t necessarily missed the boat.  After closing you still have the opportunity to refinance down the road.    Refinancing can be a low cost or no cost way to lower that rate  in the future, further improving that price that you’re going to be paying for your new home.

Fed Taper? It’s still too soon.

Most surveys of respected economists still agree that the on Wednesday the Federal Reserve Open Market Committee (FOMC) is going announce that the Fed will start tapering their buying of bonds also known as quantitative easing, the powerful weapon that they have used to keep interest rates low in order to stimulate the economy.  While this needs to be done at some point for the purposes of preserving their balance sheet and eventually staving off inflation, this months meeting of the FOMC is the wrong time to start.  There are a few key reasons including some data just released today

1) Inflation still isn’t a threat.   The indicators for rapidly increasing prices aren’t there.   The core PPI(Producer Price Index) which measures the cost of producing goods and services (excluding fuel and food) is up only 0.1%, which is practically nothing.    Retail sales (excluding automobiles) were also increasing at the same anemic pace.  Both of these numbers are indicators not only inflation, but of the direction of economic growth in the months to follow.  The next big measuring stick for inflation is the CPI (Consumer Price Index), which isn’t going to be released until Tuesday when the Fed meetings begins.

2) We’re confident but not that confident.  While consumer confidence remains high, this month’s number really missed the mark.  While 76.8% seems like a lot of American’s are confident in the economy, that number is more than 5% below last month’s 82.1%,, meaning that 1 of every 20 American’s went from having faith in the direction of our economy to losing that faith  over the last month  It’s also 5% below the 82% level of confidence that most economists expected.

3) It’s time to talk about the debt ceiling.  Bonds are debt, a promise to repay an investor principal and interest on their investment.   Most experts agree that there will be a contentious fight, when it’s time to approve another increase in the debt ceiling.    Last time this debate occurred, the US had it’s credit down-graded by one of the three major bond rating agencies,  This gave pause to the institutions and people who buy bonds.   By tapering the number of bonds purchased by he Federal Reserve at the same time, rates for treasuries and home loans could rise much quicker than the Fed would like.

4) Most families still aren’t better off than they were at the start of the economic crisis.  While incomes have increased since the start of the economic crisis, most of those increases have been realized by the top 10% of US earners.  Excluding that top 10%, real income has only increased by about 1%.    Affordability in a rising rate environment can be further impacted as, particularly in the housing sector, stalling the housing recovery that began 2 years ago

While the Federal Reserve can’t keep purchasing bonds forever to help keep our economy going, timing and the pace of tapering will be important as to the impact on our country’s economic health.  The next several months will be very telling, and as Chairman Bernanke’s tenure as head of the Fed draws to a close, we could even see a shift in the Fed philosophy on that tapering in the middle of the process.

 

 

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Jason Hecht has been a leading mortgage expert since 1995. He lives in Los Angeles, CA