January 07, 2009
Deal or No Deal?
Posted by Gordon Smith

If you have been following my mortgage rates saga, you know that I was hoping for rates in the high 4s before I close on my refinancing. As of this morning, I was locked into 5.125%, but rates went down this week again, and I can re-lock today at 4.875%. The mortgage brokerage that I am using, which happens to be owned by my neighbor, has a policy of re-locking only once. The broker wanted me to wait for the job news on Friday. If it's bad news -- "and we expect it to be bad," he said -- rates could go down again. He was hoping for 4.75%. Aside from the fact that this one-time re-locking policy does not appear to be set in stone, this was a no-brainer: lock me in at 4.875%!

Now, I am clearly no expert in mortgage rates, but I am also not in the habit of taking financial advice from people who are rolling the dice with my money. If everyone is expecting bad job numbers on Friday, I assume that expectation is reflected in the current rates. Thus, the rates will decline as a result of the jobs report only if that report is worse than expected. What are the odds of that? I have no idea, but something far south of 100%.

What if the jobs report is surprisingly good? "Then rates could go up again," he conceded. What are the odds of that? Again, no idea, but way less than 100%.

Is it more likely that the jobs report would be surprisingly bad or surprisingly good? Hmm. I have no way of evaluating that. Let's say these two results are equally likely (each has a 15% probability), but that the most likely result (70% probability) is that the jobs report will be unsurprising.

One last question: is it more likely that we would see big movements down  in mortgage rates following a surprisingly bad report or big movements up  in mortgage rates following a surprisingly good report? On this one, we know that the upward movement is capped by my current lock rate, so even without more concrete information, it seems somewhat more likely that mortgage rates will move down substantially in my favor.

So, roughly speaking, there is a 70% chance that I can get the same rate as today's if I wait until Friday, a 15% chance that I will get a worse rate than today's (as high as 5.125%), and a 15% chance that I could get a better rate than today's (with some chance that the report will be very disappointing, thus giving me a much better rate). The bottom line is that my expected rate from waiting is slightly better than my expected rate from locking in. But my risk aversion -- coupled with the possibility of bending the single-lock policy -- caused me to pull the trigger today.

Besides, can you really complain about a mortgage at less than five percent?

UPDATE: The jobs report came out, and our unemployment rate is at a 16-year high ... just as everyone expected. So mortgage rates didn't change a whit. So we are closing next week at 4.875%.

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