Have you ever watched the TV game show The Price is Right? The most compelling part of that show is when the contestant has already won something, but they are now faced with a decision. Do they want to keep what they have, or trade it in for the unknown? What lies behind door number two? Is it a fabulous prize like a new car or a trip around the world? Or is it a goat and a wheel barrow? I think it is human nature to always want more, and when I watch the show I find myself rooting for the contestant to take the chance and go for the glory. But if they get the boobie prize, it is easy to feel kind of smug. They should have been happy with what they already had. When you buy a home or decide to refinance your mortgage, you are faced with the same kind of decision. Are you happy with the rates you are offered? Or do you risk it all by going for the unknown and taking your chance on what lies behind door number two?

Once you have decided on a mortgage company and started the mortgage process, one of the first decisions you make is whether or not to lock in your interest rate. This means you have a choice, locking in your interest rate guarantees that this is the rate you will have at the closing, no matter how high mortgage interest rates may rise. On the other hand, you can float the rate, which means you are taking a risk, but you have a chance to get a better rate if mortgage rates improve. One of the services I offer my clients is to keep them informed of what is happening in the mortgage backed securities markets, and let them know about any news that could affect mortgage rates. There are times when the mortgage market is improving and the odds strongly favor rates coming down. At times like this it may make sense to float for a bit and take advantage of the trend. There are other times when the odds say that rates will move higher. At these times the best thing you can do is lock in your rate and be able to relax and sleep at night. Then there are times like now when the market volatility is on steroids and the rate swings are hair raising, but you don’t know if rates are trending up or falling down.

Mortgage backed securities (which mortgage rates are based on) have been volatile all year. Intra day price changes (where lenders change there prices during the day) used to be a rare occurrence. Now it’s normal to have prices change at least once during the day, several times a week. This whole past year has been volatile, but in the past couple of weeks we have really kicked it up a notch. When the government stepped in to take over Fannie Mae and Freddie Mac I called this as a positive for the housing market and that mortgage rates were about to get better. I nailed the call and mortgage rates dropped the next day to their lowest point since last Spring. But since then we have gone from one crisis to the next, and mortgage bonds have swung wildly with almost a half point difference in rate between the high and the low.

So what should you do if you are about to get financing and the markets are in turmoil? In times like this the fear of loss is stronger than the hope of getting a slightly better rate. The safest thing to do is to lock in at the current rates. If you lock in your rate you know what your payment will be, which will save you a lot of anxiety. If interest rates do come down you still have options.

If you have already locked your rate in and the rates tick down  just a little, there’s not a lot you can do. That’s the cost of peace of mind and the security of locking in. But in a market like this it is possible that mortgage rates could improve by a lot.mortgage rates improve by a lot. And if rates do fall by a lot, you want to be able to take advantage of the better rate. You have a few of options:

Renegotiate the interest rate -Lenders are trying to deal with this volatility just like borrowers are. They know that if mortgage rates go down by a lot, their pipelines of loans will quickly empty if they aren’t willing to work with the borrowers. This means that they may be willing to come down close to where the market is when you ask for the better rate.

Flip the loan - This means we would take your loan file from one lender and relock it with a new lender. This is something that we can do, but it’s usually not the best option. Let me explain. When I (or any mortgage broker or mortgage banker) lock in a loan I lock the rate in with a wholesale lender. The lender hedges the loan by buying an option on the mortgage backed securities market, guarantying that they will be able to take on the new mortgage at locked interest rate no matter what happens to rates between then and the closing. It cost the wholesale lender money to do this, so they expect and demand that the banker or broker close a high percentage of the loans they lock with the wholesale lenders. There are penalties if that doesn’t happen, and if it happens too much, the broker can be dropped from the  lender’s list. If this happens too often you run out of places to work with or your cost to make a loan gets too expensive. So it is better to renegotiate if possible, but if that isn’t possible and there is enough time, I will flip the loan to get the client the best rate.

No Cost refinance - Sometimes the rate doesn’t drop until after you’ve already closed. If that is the case, we can usually offer a no-cost refinance so you don’t have to stay at the higher rate any longer than you need to.

The financial markets have been nervous lately, but you can keep calm and safe by making the right moves.

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