Tom Kelly: Waiting for another rate drop? You may lose your dream home along the way

I vividly remember hoping – cross-the-fingers wishing – for a home-loan rate of less than 12 percent.

In the early 1980s, double-digit interest rates had bobbed up and down like a kid in an autumn apple barrel. We had one child in the house, another one on the way and I knew exactly how much cash the bank would lend us if rates remained steady.

“Man-o-man, just give me 11 and seven-eighths,” I said aloud at the dinner table. “We can fly with anything under 12.”

Today, while some consumers are gambling and waiting for the absolute bottom (like stocks, you won’t know until they move up), I’m encouraging folks who are shopping for a home or planning to stay put for a few years to lock in to a program that seems best for them.

If you are refinancing, take time to run your loan numbers. Gauge your current rate with what is available today. You might be surprised at the difference. Then ask yourself how long do you intend to stay in your home?

New buyers are now in great loan territory. While mortgage rates are not expected to leap any time soon, it’s usually better to close on a loan and start accruing home equity via appreciation than to gamble that rates will come down. And remember, interest rates are like stocks – you don’t know when you’ve hit rock bottom until they start heading back up again.

Several years ago, fixed-rate loan borrowers looking to “lock” their rate on a new purchase loan or refinance were crushed when a surprise interest rate “spike” of one-half to three-quarters of one percentage point in fewer than 72 hours stunned the home-loan industry.

It was the first time in the past decade that actual rate changes filtered down to consumers three different times in one day.

How did this happen to our lulled-into-low-numbers mortgage market? The weakening of the U.S. dollar, coupled with a surprise improvement in the Japanese yen and other securities brought chaos to mortgage money that was seemingly untouchable.

In a capsule, Wall Street experienced huge losses and traders cut back their positions not just in mortgage markets but in fixed-income markets as well. The number of consumers who wanted to refinance compounded the problem. When our Treasury rates took a turn for the worse, mortgage bankers had to lock the loan requests that had been floating with the market. The pent-up demand for mortgage money created the infamous situation lenders viewed “as a pig moving through a python.”

Because home-loan rates had headed down more than up, thousands of borrowers were confident to pass on a loan “locks” rate given on a specific day for the term of the loan and “float” with the market. These consumers were gambling that rates would come down before it was time to close on their loan, saving them hard cash over the life of the loan.

The gamble did not pay off. When rates shot up, loan managers locked their “floaters” fearing rates would go even higher. There was no other logical move to make – rates were historically low yet there was nothing on the horizon indicating a clear calm was near. The wild time brought higher payments to many consumers caught in the fray, pushed others away from the refinance market and forced lenders to rethink how they could better handle the process.

The home-loan business is centered on collateral (your home) and risk (your ability to repay). If your credit has always been poor and you have a difficult time hanging on to a job, the lender is going to view you as a greater risk than the customer with flawless credit and 20 years of continual employment with the same company. Typically, the greater the risk, the greater the interest rate.

If you are thinking about a mortgage – new purchase or refinance – try to clean up any blemishes on your credit report and weigh all costs and rates carefully before deciding. Make sure you understand low-fee programs and calculate how long it would take you to repay the refinance costs.

But don’t wait for rates to come down. You could get old – and lose your dream home – waiting for that day to arrive. Mortgage money once cost three times as much as it does today, and that was not long ago.

In fact, rates simply haven’t been much better in the past 30 years.