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Don’t try to time rates if you’re refinancing

Updated: May 3, 2013 12:14PM

Originally published: November 19, 2002

Will the Federal Reserve cut interest rates once again? That’s the great debate today on Wall Street and Main Street. Continued news of a weakening economy could force the Fed to make a rate cut as soon as next week. But over the past two weeks, strong economic news pushed up yields on the benchmark 10-year Treasury note to 4.25 percent from 3.5 percent in a matter of days.

Don’t bet your house on interest rates

Bond traders make and lose millions on these volatile interest rate swings, but do you want to bet your house on them? That’s just what you’re doing if you try to lock in the absolute lowest rate when refinancing your mortgage. And a losing bet could cost you money every month for the next 30 years.

So don’t try to pick the absolute bottom in interest rates. If you guess wrong, and rates fall even further, you can always refinance again. But if you miss the turn, you’ll kick yourself even harder than you did when you failed to sell your tech stocks at the peak.

And there’s one more thing to worry about. If rates do start to rise, the crush of refinancings may mean that you can’t complete the process before your locked-in rate guarantee expires. Then you could be left out in the cold, forced to accept a higher rate--and higher monthly payments--than you planned.

Today, most financial institutions will tell you they can’t close on a mortgage application for at least 45 days. Some are quoting two months. In between, a lot of things could change, so here are a few questions to ask, and some details to get in writing.

* Check your “lock” or guaranteed rate. Will it expire before you can reasonably expect to close, given the backlog of appraisals, title searches, etc? What happens if the failure to close is the fault of the delays in the process, and out of your control? Will your rate lock expire?

* Is your rate lock-up subject to “availability of funds”? Mortgage brokers, as opposed to direct lenders, may have an “availability of funds” clause in the contract, meaning the broker can void the contract if no funds are available from a lender. Of course, if rates rise before you close, there certainly won’t be funds available at that low promised rate. The contract could be void. And you’ll be stuck hunting for a mortgage at higher rates.

* Can you win either way? If rates drop, has your financial institution promised that you’ll get a lower rate than promised? What are the terms and conditions of that promise? And if rates rise, must they keep their original promise of a guaranteed low rate? Odds are, you won’t get it both ways.

You’ll want to keep track of the mortgage process along the way, making sure that the financial institution has all the documentation necessary. You don’t want to give the lender any excuse not to close, should rates start moving up. Call and ask how the process is going.

Consider the alternatives carefully before you decide on what type of mortgage you’re applying for.

?183-142?Take a fixed-rate, 30-year mortgage if you’re stretching to buy the home. Variable rate loans may have lower initial payments, but the monthly check could really jump if rates rise in coming years.

If you’re making a low down payment, remember to count the monthly cost of mortgage insurance designed to protect the lender in case of default.

When a 15-year mortgage makes sense

Take a 15-year mortgage if you’re willing to make higher monthly payments in exchange for saving a fortune in interest along the way. This is a particularly attractive deal if you’re planning to live in your home for a long time.

Take a fixed rate, with a seven-year balloon (requiring you to pay off the loan or refinance in seven years) only if you know you’ll be moving soon, or are very confident that you’ll be in a strong financial position. Otherwise, your balloon could burst in seven years, and you could be scrambling with a lot of other people to refinance at a time of higher rates.

Refinancing your mortgage has become the new all-American sport. Getting the best deal gives you bragging rights at the office. But, as in horseshoe throwing, this is one game where close really counts. This should be about as close as it gets. And that’s The Savage Truth.

Terry Savage is a registered investment adviser and is on the board of directors of McDonald’s Corp. Send questions via e-mail to She appears weekly on WMAQ-Channel 5’s 4:30 p.m. newscast.

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