can one lock in a mortgage rate?
Question: Here is a simple question, which does necessarily have a simple answer. Let’s say I plan to buy a house in a year and I know (ok, I speculate ) the interest rate will rise. Is there anything I can do to get a mortgage rate of the current level a year later?
There are probably more ways to bet on interest rates than I care to know about. What I am hoping for is something similar to sell short against the box to lock in profit at year’s end, which simple to do and understand.
Your help is appreciated.
Answer: that is theoretically possible but potentially expensive. You can do T-bond or 10-year note futures in increments of 50K, if you count the Mid-Am “mini” – 100K on the CBOT more typical. You would go short, and use any money you made as bond prices dropped (rates rose) to pay discount points on your mortgage, if the lender is willing to take enough points cash to get you to the rate you want (there may be a limit to how low a rate they would extend, I don’t know).
Problem is if rates DROP, you have to pony up LOTS of cash, like say $10,000, for the privilege of your hedge, unless you use some kind of system to trade in and out, using a hedge only when you think rates are really rising. But that’s the whole game, isn’t it.
You can use futures options, pay a fixed amount (and no more) to create a similar hedge, but the option seller will want a lot of premium for taking a full year of risk at prevailing rates or even slightly higher rates. You’d buy a Dec. ‘95 or Mar. ‘96 put for each 100K, assuming the pit will do an option at that duration. Strike price maybe 96? 94? 92 would be cheaper but you’re talking more like a “cap” rate about 50 or so basis points up (someone help me out here on the math).
Wish it were easier–you’re better off just crossing your fingers, if you have 10K to risk you can use that to increase your down payment, and plan to refi next rate cycle (probably will be a recession or worse in 96/97, right?).
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