Mortgage Rates – What Makes Them Fluctuate And When You Should ‘Lock’ Your Rate

By Brad Litz
Real Estate Broker, Appraiser & Investor
Meridian-Kessler Resident

Mortgage rates are on top of everybody’s minds these days and are heavily covered in mainstream media. The media loves to create drama every time rates slightly tick up and the radio ads that we hear are always trying to sell us on the idea that we should hurry up and get financing in place because rates could move any day. All this does is cause a lot of anxiety in the market, so I thought some basic information on rate locks and what makes rates fluctuate might help ease some nerves.

Should you lock your rate or float it?

You can pre-lock an interest rate at the time you are applying for your mortgage, which can help ease fears of an uptick in the market during your escrow period. The best reason to do so would be if your debt-to-income ratio is close to the maximum, so if there are any rate fluctuations, your ratio won’t go above the maximum, effectively not qualifying you for the loan. It can also be wise if mortgage rates are very low and there is little expectation that rates could improve further.

Others often choose to ‘float’ their mortgage rate and lock sometime between the application and closing. This is, effectively, gambling on the market in the hopes that rates will improve in that same time period. This can raise anxiety levels, but can also pay off by saving lots of money if rates do, in fact, go lower prior to closing and you lock at the right time. Again, this is a gamble.

What makes interest rates fluctuate?

There are actually a lot of factors that determine whether rates go up or down, but a good indicator is the 10-year Treasury bond yield. (Again, this is just an indicator, which means that it is not always perfect).   True, most mortgages are packaged as 30-year products, but the average mortgage is paid off or refinanced within 10 years, making the 10-year bond a good indicator.

Typically, when bond rates (also known as bond yield) go up, interest rates will go up as well, and inversely, when bond rates go down, interest rates will go down. Many investors turn to bonds as a safe investment when they don’t feel that the economic outlook is strong. Therefore, when bond purchases increase, so do mortgage interest rates.

Here is a helpful bit of information that you can follow on almost any finance website or the newspaper:

  • 10-year bond yield up, mortgage rates up
  • 10-year bond yield down, mortgage rates down

In conclusion, if you are happy with your rate quote and the payment is comfortable (and you have a low tolerance for risk), then I think anxiety can be eased by locking your rate early. If you have a higher tolerance for risk and think you can read the indicators, then the reward can certainly be worth the risk and you can float your rate until you are satisfied with your rate.