Mortgage Refinance: When to Lock?

I showed this chart in my previous post about comparing the total closing cost from different lenders.

In addition to the cost difference across lenders, it also shows the total closing costs go up and down quite significantly from one day to another. Even with the least expensive lender, choosing when you lock your rate can save or cost you $1,000 or more. So how do you know when you should lock your rate?

I wish I have a definitive answer for you. Thursday will the best day. Just kidding. But I don’t give up easily.

Watch the Mortgage Backed Securities Market

The costs go up and down because of the movement of the mortgage market. The mortgage market is not as volatile as the stock market, but it’s still unpredictable. It can be affected by government economic data releases, a Fed official making a speech, or just nothing in particular.

The rate and closing cost offered by the retail lenders are driven by the wholesale rates they receive from their upstream banks (called "investors"). The wholesale rates are affected by what Fannie and Freddie will pay for the mortgage. What Fannie and Freddie will pay is affected by their borrowing cost, reflected in the yield of mortgage backed securities (MBS).

This mortgage banker by the name of MMNJ on FatWallet Finance forum posts MBS price movements daily, sometimes once in the morning and once in the afternoon. He’ll say MBS is trading +9/32 or -11/32. By tradition bond prices go by 1/32s. When MBS is up, the mortgage rate likely goes down, and vice versa. No guarantees but it helps if MBS is up. +9/32 is good; -11/32 is bad.

You can follow the FatWallet thread for MBS updates or just follow the price of an ETF that tracks mortgage backed securities: iShares Barclays MBS Bond Fund, ticker MBB. When you see MBB is at a high point relative to the recent past, it’s probably a good time to lock your refinance rate. Again, no guarantees of course, MBB can go higher and the rate can come down further.

Know What’s Possible

Alternatively, you can track the lender’s offers, say for a week or two, like how I showed in the chart at the beginning of this post. Then you will know what’s possible.

The market fluctuates. Over a short period though, it fluctuates within a range. When you see the rate and cost come down near the low point again, you can lock the rate and be satisfied that you did better than you otherwise would if you just chose a random day to lock your rate.

There’s another benefit to this approach. Say you observed that the total closing cost offered for the same rate varied between $100 and $1,600 in the last two weeks but when you applied the market is at $900. Instead of accepting the $900 offer, you tell the loan officer to watch it for you and lock you when it gets to $100 again.

He may not offer you $100 when the market is at $900 but he might when the market moves to $300, just to end your holdout and move forward. If you simply asked for a $200 discount initially, you would’ve paid $700. Let the market help your loan officer help you.

Is It Worth It?

Is it too much trouble? Don’t they say you can’t time the market? You be the judge. To me, saving a $1,000 by waiting a few days is totally worth it. If it goes up instead of down, I just wait.

This is part of a "How to Refinance" series of posts. Other posts in the series include:

• Mortgage Refinance: Is Your Lender Legit?
• Mortgage Refinance: Which Lender?
• Mortgage Refinance: Tradeoff Between Rate and Closing Cost
• How Much Money Does a Bank or Broker Make From a Mortgage Refinance?
• Mortgage Refinance: What If Rate Drops After You Lock?
• Mortgage Refinance: Before and After Closing