FLOAT OR LOCK?

Floating or Locking?  We have a very efficient bond market, meaning that the price of every bond today is based upon all known information, which includes the market’s predictions for tomorrow’s reports. There is a 50/50 probability that the market’s educated guesses on where each of tomorrow’s reports will come out, will be either too high or too low. This is why every day there is a 50/50 probability of a good versus bad news surprise in any report being released. That why there is a 50/50 probability of rates getting better or worse every day.

A borrower who floats in a normal market is taking a 50/50 bet every day of getting a better or worse price. If a person enjoys gambling and wants to take a 50/50 bet each day, this is a fair bet if the amount they win or lose is exactly the same.

The reason I strongly encourage home buyers to lock rather than float in today’s volatile and uncertain markets, is that a floater has much more to lose than they have to gain by floating. In my opinion, it is simply a very bad bet from a mathematical probability of expected winnings versus expected losses. If rates jump up, they could stay up for a long time and the homebuyer is stuck with a higher payment for a long time. If rates drop down the homebuyer can refinance and only lost on the lower payment for the short time until they refinanced.

Bottom line a floater is taking a 50/50 bet to get stuck with a higher rate for a long time, compared to the opportunity cost to have had a lower rate for only a few months until they refinanced.

Let’s say rates are 7% today and there is a 50/50 chance they go either to 8% or 6% and stay at that level for the next four years. A floater is risking paying a 1% higher rate for the next four years, and if rates drop, the floater only gained the opportunity to pay the lower rate for six months, assuming the locking borrower does a refinance six months later.

So, take a 50/50 bet to either pay 1% more for four years or pay 1% less for six months?

My suggestion is lock today, protect yourself from the 8% scenario, and if rates drop to 6% you refinance in six months and get the low rate for the rest of the time you own this home.

" This Market Update and similar such communications are for informational purposes only and are based on publicly available information. These materials are general communications, which are not impartial, and are provided solely for discussion purposes, and not in connection with any product or service offering. The opinions and views expressed in this Market Update are as of the date of this communication and are subject to change. Any forward-looking views and statements contained in this Market Update are based on current estimates or expectations of future events or results. Actual results may differ materially from those described in this Market Update. The views expressed in this communication should not be attributed to Guild Mortgage Company as a whole and may not be reflected in the strategies and products offered by Guild Mortgage Company."