I just had a very interesting conversation with a client: It seems his son is purchasing a new home in Florida and won't be settling for six months. The big dilemma is whether this fellow should pay a hefty up-front fee to lock in his interest rate for the next six months. Or should he save the fee and float his rate until he's within 60 days of settlement?

As most people know by now, mortgage rates took a sharp turn upwards about three weeks ago. Mortgage brokers across the country are now scrambling to close their loans before the locks expire.

Now would-be refinancers and purchasers are asking only one question:

"Do you think interest rates are going to go back down?"

It's a good question. If I could answer it accurately I would be doing a great service to the Florida man buying the new home. If I said "yes," he would float his loan for six months and lock in to a lower rate. If I said "no," he would pay the fee for a long term lock before the rates increase further.

Here's the problem: No one can accurately predict the movement of long-term interest rates -- and I'm not sure about rates tomorrow or next week either.

Long-term interest rates are controlled by market forces, and market forces are determined by future events and information. For example, what if - God forbid - there's another terrorist attack on American soil? Do you think it will have an effect on mortgage rates? You bet it will.

International news is another example. What if the economy collapses in Argentina? Investors may then pour their money into U.S. Treasury bonds. This would make mortgage rates drop. Can that happen? Yes, it can and it has -- with no warning.

How about domestic economic news? What if next week's unemployment numbers come out much higher (or lower) than expected? Can that have an affect on mortgage rates? You bet.

The only thing certain about mortgage rates is that they are dynamic -- always moving in one direction or another with no warning of a U-turn. So, if you bought a house when interest rates are at a four or five year high, remember what George Bailey says in It's a Wonderful Life: Don't panic. Rates will come down again. They may go up for awhile first, but at some point they'll come down again.

Today's rates are still historically low -- at least by the standards of the past few decades. So if you're buying a house, a fixed rate, hovering around seven percent is cheap money. Remember that you can't catch the bottom of a falling sword.

If, in a year from now, you want to buy a house and interest rates have spiked to 8 percent or more, consider an adjustable rate mortgage (ARM). These programs carry a lower rate for the first three or five years. If you agree that interest rates are dynamic, they will eventually fall which will provide a refinance opportunity.

Here's a caveat, however: If you decide on an ARM or any mortgage, make sure you keep up-front fees and points to a minimum. You don't want to pay excessive fees for a loan that may be paid off early -- and you also don't want financing which includes a pre-payment penalty.

For more articles by Henry Savage, please press here.

Published: December 12, 2001

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