The Markets are Volatile

The roller coaster ride in the financial markets continues. Some of the swings are good for interest rates — some are not so good. At best, it is a nerve-racking time for anyone who is watching their investments.

The severe economic problems in Greece precipitated a flight to quality — a rapid switch by investors to less risky investments such as gold or bonds — in the markets. Investors sold off stocks in a large way. The Standard and Poors 500 index has had a wild ride in the last few months. The index topped out on April 23 at 1,217 points, and on May 25 dipped to 1,025 — a swing of 16 percent.

The 10-Year Treasuries on April 23 yielded 3.82 percent, just shy of its high watermark on April 7, when the yield was 3.86 percent. On May 25, the yield dipped to 3.16 percent.

The London Interbank Offer Rate (LIBOR) index, to which many adjustable rate mortgages (ARMs) are tied, spiked to 1.016 percent in May from a low of 0.846 percent in February. Most adjustable rate mortgages add a margin of 2.00 percent to the index that gives the mortgage holder their newly adjusted interest rate. This means those newly adjusted ARMs would be around 3 percent. These rates are still very low by any standards.

This is a good time to be educated on locking and floating interest rates. When you take out a mortgage for a purchase or refinance mortgage you have to choose when you want to lock in your interest rate. You can lock it in at the time of application on a refinance (though on a purchase loan you need to have a contract in place). The lock exploration can be anywhere from 30 to 90 days. If your settlement date on a purchase is 45 days out, then you need a 45-day lock.

Once you decided to lock in, the rate will not go up or down during the lock-in period. If you locked for 45 days at 5 percent with no points, this will not change during the 45-day period.

If your lock expires before the settlement can be completed, then the lock has to be extended. If the “new” rates are higher then the “original” rate, then the “worst case” scenario is used. In this example, if 5 percent now costs a half point, then the new rate will be 5 percent with half of a point. If rates are lower when the lock expires, then the original lock is used. So if the “new” rates are 4.875 percent with no points, the customer does not get the lower rate. They would have to stay with the 5 percent rate.

Sometimes rate locks can be extended before the locks expire. There is no advantage in letting a mortgage lock expire. The only time the newer rates can be used is if the rate has expired and over 30 days have elapsed.

During this period of turbulence, interest rates have gone lower, which has caused a lot of customers to question if it is a good time to lock in or if they should look for even lower rates. Those who were locked in questioned if they could float down to a new, lower rate.

On rare occasions a float down can be accomplished. For this to happen there has to be a very significant drop in rates that allows for an adjustment to be made. The bank has to add on some additional pricing so it does not lose money on the adjustment. The usual outcome is the prevailing rate, plus 1/8. The latest fluctuation in rates was not enough for a float down to be triggered.

During these periods of market instability, instead of trying to time the markets, jump on rates when they tick down. If you are offered a fixed rate with a “4” in front of it, be happy. Remember that rates generally rise faster than they fall.

Bill Starrels is a mortgage loan officer who lives in Georgetown and specializes in refinance and purchase mortgages. He can be reached at 703-625-7355 or bill.starrels@gmail.com.

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Fri, 25 Jul 2014 14:17:20 -0400

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