Mortgage rates go on a thrill ride

Mortgage rates have gone on a roller-coaster ride in the past couple of months. And, like a roller coaster, the recent rises and drops in mortgage rates have made some people giddy with delight and have left others sick to their stomachs.

- advertisement -

The ups and downs continue this week. The benchmark 30-year fixed rate rose 15 basis points to 7.05 percent, according to the Bankrate.com national survey of large lenders. A basis point is one-hundredth of 1 percentage point. The mortgages in this week's survey had an average total of 0.64 discount and origination points.

To illustrate the effects of mortgage-rate vertigo, we'll look at what happened to those who applied for a mortgage on Oct. 10 and what happened to those who applied just two weeks later.

On Oct. 10, Bankrate.com's national survey of large lenders showed that a typical mortgage rate was 6.64 percent. That's low by historical standards. Risk-averse borrowers no doubt locked into a rate in that neighborhood, and the gamblers decided to let the rate float during the month before closing.

The gamblers won. Four weeks later, a typical mortgage rate was 6.42 percent, a modern-day low. As rates dropped over that month, the gamblers were grinning, raising their hands in the air and yelling, "Wheee!" Those who had locked in at about 6.64 percent looked a little green around the gills.

Now take a look at those who applied for a mortgage Oct. 24. On that date, the Bankrate.com national survey of large lenders showed that a typical mortgage rate was 6.67 percent. Rates went on a wild ride during the next four weeks -- a two-week plunge to 6.42 percent followed by a steep, two-week climb to 6.90 percent. Talk about a roller coaster!

So, in light of the mortgage-rate thrill ride of the past couple of months, should today's mortgage applicant lock or float? Beware anyone who answers with certainty.

Bankrate.com's weekly Mortgage Rate Trend Index, available at www.bankrate.com/rti/, is a valuable resource. It's a survey of what people in the mortgage business predict will happen to mortgage rates in the coming 30 to 45 days. The respondents are never unanimous, and the majority is often -- but not always -- right.

To help decide whether to lock or not, read the results of the weekly survey, read the respondents' comments, take a look at key economic reports and weigh those against your risk tolerance and your broker's or lender's advice.

An abrupt change in mortgage rates means big money. Take the example of two people who got 30-year mortgages for $150,000 last month -- one who locked at 6.42 percent and one who locked at 6.90 percent. The former pays $940.22 a month in principal and interest. The other pays $987.90 a month. Over 30 years, that's $17,164.80.

But it's not only about money. Pride is at stake. Neil Cribb, president of Mortgage Financial Network in Safety Harbor, Fla., says he gets nervous when rates reach the bottom of a trough because when they start back up, "we're going to have a lot of angry customers" who want to lock in at the rate of a few days ago. It doesn't work that way, and it's seldom a good idea to break a lock.

"One of the things that people talk about in their social conversations is the interest rate they're paying on their mortgage," Cribb observes. It's a status thing. Cribb says people are less likely to one-up each other over their credit card or car loan rates.

"People have huge credit card debt and they're terrified about one-eighth of a point on their mortgage," Cribb says with a touch of wonder in his voice. "They won't have a clue about their car loan or credit card rates."

Any time you can lock in a rate under 7 percent, you're getting a good rate. While explaining in 1999 why you should pick your rate lock with care, Comerica economist David Littmann gave some advice: "You want to secure rates that are relatively low by recent historical standards."

If you get a mortgage below 7.25 percent, it's low by historical standards.