When To Lock In A Mortgage?

Yesterday, a commenter mentioned that they had a variable rate mortgage and were wondering when to lock-in.  I don’t think they are alone.  I suspect in this housing frenzy, a lot of people got variable-rate mortgages or in some cases interest-only mortgages.

How do you know when to lock-in?

Hedging a mortgage is tough.  The products that you can use are either too volatile, or they are sized too big for most people to accurately put a realistic hedge on.  If you have a mortgage of a million or more, you can hedge.  If you are really sophisticated, you can put some options on and roll the position over and over and be more precise with your hedging.

Most mortgages are based on the London Interbank Rate (LIBOR).  Of course, that’s going to change in a year and there is a decent chance that Ameribor could become the new benchmark.  The current Ameribor rate is .08850%.  The futures market for LIBOR is the Eurodollar contract at the CME.

The way you figure out the actual interest rate is to subtract the contract value from 1.  The June 2o21 contract was trading at 99.84 yesterday.  So, take 100-99.84=.16%.  Interestingly, the Ameribor rate is roughly half the LIBOR rate.  If the market switches over to Ameribor, borrowing rates could go down.  The December Eurodollar contract for 2023 is trading at 98.97, so 100-98.97=1.03%. Basically, you are looking at a 1% rise over two years.  That’s not, or shouldn’t be prohibitive.

You will have to check how many points above LIBOR you pay by looking at the fine print in your loan.  Most people pay 2-4 points above LIBOR.

Another place to look is the Fed Funds Rate at the CBOT which is part of CME.  CME publishes a handy tool that shows you the probability that the Federal Reserve will raise rates at their next meeting.  At the next meeting in 34 days, the probability that the Fed will raise rates is 9%.  That’s up a bit in recent days, but still, there is a 91% probability that the Fed does nothing.  When you go out to the end of the year, there is an 11.9% chance rates will go up.  Of course, since this is based on the market, markets change.  So, you just have to watch it.

I always think that if you can borrow under 4%, the money is basically free.  At Bank of America, the 30-year fixed mortgage is still 2.875%.   At Wells Fargo, it’s 3%.  Even 30-year jumbo paper is 3%.

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