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| Simple Facts | ||||||
What causes Interest Rates to change? There are a couple of primary drivers to changes in interest rates (and the Federal Reserve is only partly to blame). The first driver is supply and demand. Most mortgages are put together in pools and sold to investors through mortgage backed securities that offer a rate of return similar to a bond. Those investments are competing in the market place with other investments like stocks. At the risk of over generalizing, an investor can choose to put their money in stocks (more risk) or bonds (less risk but less return). Investors will balance their investments (how much they put where) based on how much risk they want to take, and their perception of the overall economic health of the country. If they feel the economy is doing well, stocks will go up and so they’ll place more money in stocks and less in bonds (and mortgage backed securities) and visa versa. As a result, a strong economy in a basic sense means higher interest rates, and slower economy means lower interest rates. The second driver of interest rates is inflation. Inflation is the enemy of low interest rates. When an economy heats up and starts growing too fast, inflation can occur. Inflation means the cost of goods go up and the dollar doesn’t go as far. If my dollar is worth less, I want a higher rate of return on my investments which in turn means higher interest rates. High inflation means higher interest rates (in the 80’s when inflation was out of control interest rates on mortgages were around 18%!) and low or no inflation means lower interest rates. As a result, every economic report can potentially affect interest rates, although some more than others. In general, good news for the economy is bad news for rates and bad news for the economy is good news for rates. That’s why rates fluctuate daily and in some cases several times a day because something has been reported that affected the way investors felt about the economy. The good news is that the world financial systems have become incredibly sophisticated and monetary policy is manipulated to keep economic growth and inflation reasonable by entities like our Federal Reserve System. They control the lending rates from the government to the banks in their system and the banks generally follow suit in their rates to their customers. While the Federal Reserve doesn’t directly affect mortgage rates, there is somewhat of a trickle down effect. The reality is that rates are at historical lows and while some increase is inevitable, there is no reason to expect them not to stay at a level which makes homeownership a very affordable proposition. |
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Why don’t you post your Interest Rates? Lots of lenders post their interest rates on their websites, in the paper and other advertisements. We don’t, and here’s why. First off, the rate doesn’t tell the whole story. It is important to look at best execution on a loan. That means not only the rate, but the fees, the structure of the loan, and even the loan program itself. There are hundreds of loan products and programs and loan structures available on the market today. There are at least two dozen different variables in your transaction that can affect the interest rate. If we quote you a generic rate, there is a great chance it may be wrong specific to your circumstances. We feel it is irresponsible to quote you an interest rate until we have spent time understanding your transaction, your circumstances, and what you are trying to accomplish. Second, advertising a rate as a means of attracting your business means the only basis for your decision is price. The reality is that all mortgage lenders are not created equal. Making a decision on just one dimension is a disservice to yourself. Think about websites and newspaper ads that list multiple lenders rates. Those are advertisements. The lenders pay money to be there. If the lender is paying money to be there and the basis for comparison is rate, in other words, the rate has to be lower than everyone else’s to have any hope of getting someone to call, what is the lender going to do to make the phone ring? The answer is put the lowest possible rate on here, even though the rate may be on a program that won’t work for you. |
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When should I lock my Interest Rate? Locking your rate means committing to a specific loan program and structure at a specific interest rate for a specific period of time. As long as you close your loan before the expiration of that lock, we are committed to honoring the terms of that loan regardless of market activity. Rates can generally be locked anytime after the loan application has been made but no later than five business days before the scheduled closing date of your loan. Rates can be locked for varying periods of time. Typical lock periods are 15, 30, 60, 90, 120, 150, and 180 days. As a general rule, the longer period of time you are locking in the loan for, the more expensive the loan will be either in terms of higher fees and/or a higher interest rate. Extended locks, typically used for new construction, often have some type of up front lock fee attached to them. Rates are subject to change at anytime without notice and do tend to move up and down from day to day based on market activity so the big question everyone asks is “When is the best time to lock?” The best time for you to lock depends on a couple of different variables including when you are scheduled to close on your loan, the affect a changing interest rate could have on your approval, and your tolerance for risk. It is important to lock your loan for a period of time long enough to safely cover your closing date. In fact, we encourage you to lock for a period of time longer than your closing date in the event it is delayed for any reason. This is especially true with new construction. We typically recommend a lock that exceeds your expected closing date by 7-10 days. We recommend that you think about and discuss with your loan officer what your lock strategy is going to be. Because an increase in rates will result in an increase in payment, you have to decide if the risk of waiting for a lower rate and having the rates go up is worth the reward of a lower payment if rates go down. What often makes sense is to think in terms of a range. The top end of the range is your bailout point. That is the not to exceed rate you will lock in at if rates are going up. The bottom end of the range is your target or ideal rate. That is the rate you will lock in if the market drops to that point. Most experts will tell you it is virtually impossible to time the market. Thinking in terms of a range will make the process much less nerve wracking. Because a shorter lock generally means a lower costs in a typical market where rates are not moving up or down significantly, a minor increase in rates will likely be offset by a shorter lock period. If rates stay the same or go down the shorter lock will also work in your favor, so the only risk in waiting to lock in for a shorter period of time is in an environment where rates go up dramatically. That is the environment where a bail out strategy makes sense. We are happy to share with you some historical data on rate movement and the rates and costs on various lock options so you can make a locking decision with confidence. Once your loan is locked we will send you a lock confirmation for your signature. That lock confirmation, signed by both parties, is our commitment to you to honor the lock and terms of the loan you locked in at for the period of that lock. |
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How do I know what Interest Rates are doing? Interest rates are subject to change daily, but that doesn’t mean you should check them daily. Worrying about every minor change in the market will drive you crazy. We’ve linked below with Freddie Mac. Freddie Mac is one of the primary mortgage secondary markets. Freddie Mac surveys lenders across the nation weekly to determine the average mortgage rates. Lenders are surveyed each week and the mix of lender types; thrifts, commercial banks and mortgage lending companies, is roughly proportional to the level of mortgage business that each type commands nationwide. The survey results are used extensively in the media; and have evolved into the foremost reliable, representative source of regional and national mortgage rate trends. The link below will tell you the national average for interest rates. While rates are specific to the borrower and the transaction, this is a place you can check back as often as you’d like to get a feel for the general direction of interest rates. This coupled with periodic discussions with your loan officer will help you keep your fingers on the pulse of the economic markets so you have the best chance possible of locking your loan at the optimum time. (Click here to view the Freddie Mac Primary Mortgage Market Survey) (We have no relationship with Freddie Mac and make no representations as to the quality of their content. But we felt it contained valuable information that you might find of interest and in that light are sharing it with you here.) |
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Photography by Todd V. Wolfson - toddvwolfson.com
Copyright 2004 DHI Mortgage Site created & maintained by DHI Mortgage |
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| Arizona license # BK0901845, DHI Mortgage Company I, LTD. Georgia Residential Mortgage Licensee, License # 13591 at 12554 Riata Trace Parkway, Austin,Texas 78727. Illinois Residential Mortgage License # 05470(A) , at 12554 Riata Trace Parkway, Austin, Texas 78727. Licensed by the Department of Corporations under the California Residential Mortgage Lending Act (916) 227-0931, License # 4130364. Not an offer to enter into an interest rate or discount point agreement under Minnesota Statute 47.206. |
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