||Ask Dr. Don
A 330-day rate lock?
Dear Dr. Don,
We are building a new home to be ready
in April or May of 2004 in Northern Virginia. My question is anticipating
a fed rate cut. Do you recommend us to lock (330-day lock) the rate
now or wait till the rates are lower than the quotes below:
5/1 Jumbo ARM: 3.92 percent to 4.03 percent
7/1 ARM: 4.09 percent to 4.27 percent
The longer the lock, the more expensive it is to lock in a
rate. Start by considering the cost of a 330-day lock vs. other
rate-lock maturities to decide what you're willing to pay for the
certainty of locking in today's rate.
Price a float-down option that gives you a one-time
opportunity to switch to a lower rate. Estimate what it will cost
you to walk away from a rate lock if rates continue even lower.
Rate locks with new construction can be particularly dicey if you
can't close within the rate-lock period because of construction
Adjustable-rate mortgages (ARMs) are priced at a spread
to an underlying index like the Eleventh District Cost of Funds
Index (COFI), the London Interbank Offered Rate (LIBOR), or a Treasury
Constant Maturity (CMT). Use Bankrate's Track
Rates feature to follow movements in these rates.
An ARM that doesn't reset until five or seven years
out also has to price in the interest rate risk that the lender
faces by keeping your mortgage rate constant over the initial term.
You can see how it affects interest rates in the difference between
the 5/1 and 7/1 rates you presented in your letter. A reduction
in the fed funds rate will be reflected in the ARM indexes but may
have a different effect on longer-term interest rates.
If a rate cut is perceived by the financial markets
as inflationary, longer term interest rates will increase on the
news of a rate cut. Since 5/1 and 7/1 ARMs are a cross between an
adjustable-rate and a fixed-rate mortgage, their rates may not follow
the pricing index to lower levels.
Bankrate has a weekly Rate
Trend feature that takes the pulse of the mortgage market by
surveying mortgage professionals and reporting where the pros see
rates heading. You can have this feature delivered to your electronic
mailbox every Thursday in an editorial
alert, or just visit the site to get this week's read on the
-- Posted: July 2, 2003