- The Washington Times - Thursday, September 7, 2006

We’ve discussed the very real possibility that long-term interest rates could be near or at the end of their latest upswing trend.

I have always maintained that predicting the direction of long-term mortgage rates for the purpose of timing a mortgage rate lock was akin to playing the slots in Atlantic City. To predict whether a 30-year fixed rate will be at 6.50 percent or 6.375 percent next week is virtually impossible.

Long-term rates move in reaction to national and global events, both political and economic. I’ve been in the mortgage business almost 20 years. In that time, buyers who chose to “float” their interest rate during the mortgage process in hopes of catching a lower rate, have, in most instances, ended up locking at a higher rate than what was originally available.

Let’s pretend you have ratified a contract to purchase a home and are sitting with a loan officer filling out the forms. The loan officer quotes an interest rate of 6.50 percent that can be locked for 30 days — long enough to cover your settlement date. You decide to “float” your rate instead, which means you are subject to interest rate movements until such time you decide to lock.

Obviously, your decision to float is motivated by your belief that interest rates will fall sometime between now and your settlement date. You hope to grab the opportunity when it rises and lock into a lower interest rate.

You hop on the Internet, study the recent movements of rates, and decide that they are on their way down. You could be right. I see that 30-year fixed-rate mortgages have dropped by about percent in the last 2 months. Even though your settlement date is in 20 days, you are hoping to lock in when the rates are lower in the next couple of weeks.

As I said, your strategy may work, but let’s take a closer look at the movement of long-term rates during the last couple of months.

Long-term mortgage rates follow the movement of the yield of the 10-year Treasury Bond, so let’s examine the T-Bond’s recent history. On Aug. 25, the yield stood at 4.8 percent. On Aug. 11, the yield stood at 5 percent. Folks who decided to lock on that date should have waited. Floating would have made sense. Let’s go back another week.

On Aug. 3, the T-Bond yield was hovering below 4.9 percent. If we go back into July, the yield generally fell the entire month, with a couple of short-term spikes. Let’s rewind some more.

In mid-June, the T-Bond yield was hovering around 4.95 percent. By the end of June, it spiked up to 5.25 percent. The folks who floated in June for an end-of-month settlement lost the bet.

I hope my illustration is clear. The prediction of mortgage rates over a very short period is nearly impossible. All it takes is one piece of economic news from the Labor Department, one politically newsworthy event from the Middle East, or one off-the-cuff statement from Federal Reserve Chairman Ben S. Bernanke to send the bond market reeling in one direction or another.

For those of you who have a real estate settlement pending in the next 30 days, recognize that floating your rate is no guarantee of getting a better rate.

What about predicting the movement of interest rates over the long term? Where will mortgage rates be in a year from now? In my view, this is an easier prediction, although never guaranteed to be right.

Henry Savage is president of PMC Mortgage in Alexandria. Reach him by e-mail (henrysavage@pmcmortgage.com).

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