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Should I "float" or "lock" my rate?

Occasionally the question arises about what is meant in the Mortgage Industry by "the risks of locking" or "the risks of floating" Before clarifying, we need to have a fundamental understanding of how financial instruments such as mortgage bonds, corporate bonds, treasury bonds, commodities, futures, options, and stocks trade in a free market.

The Personality of Mortgage Bonds

First, there are a tremendous number of possible factors or variables involved in why any particular bond or stock trades the way it does. Some of these variables include fundamental analysis or evaluation, economic news, financial news, trader psychology, technical analysis and technical indicators to name a few. Another point to consider is each individual entity traded, such as a particular stock or bond, can exhibit its own "market personality" by trading in response to or because of a combination of some of the variables just mentioned. There is even an interesting theory called "The Personality of Markets Theory" developed by Ed Downs of Nirvana Systems that states individual securities exhibit individual personalities and if you can pinpoint a security's personality, and apply the right trading system for that personality, you can predict its next move and make money.

So, what causes these different personalities to develop? Price moves occur because of what people do and, human nature says people tend to be rather predictable. Furthermore, the same people make up a large portion of the market. So, the traders who liked a mortgage bond or stock last week and are selling it this week, will probably like it again next week. Again, human nature says that once you've traded a security and either made a good move, or missed a move, you will look for another opportunity to try again. Also, different types of people are attracted to different types of securities.

Technical analysis is the art of measuring these repeating patterns of human behavior in order to predict future behavior and the resulting price action. By looking at the past behavior of the market, traders have observed certain patterns and created trading systems based on those patterns. You can use these systems to predict what will happen next in the market or in a particular security. The problem is that there have been hundreds of trading systems developed; all of which work well as long as the market is exhibiting the personality for which the system was designed.

The trading system we've been successfully using with mortgage bonds is the Japanese Candlestick method of trading. Japanese Candlesticks capture the psychology and personality of the mortgage bond market. Candlesticks have also been remarkably accurate for us in signaling reversals in direction and predicting moves in mortgage bond prices.

The personality of the mortgage bond market can change from time to time. It can occasionally be volatile but most often it is either trending or in a trading range. While trending or within a trading range, we look for resistance and support levels to help define the risks of locking or floating at a given point in time. There are a number of ways to determine resistance (where selling pressure occurs) and support (where buying pressure occurs) levels for different periods of time. Usually, resistance and support levels can be charted on a short-term (1-16 days), medium-term (17-32 days), or long-term (33-64 days) daily basis. Previous intra-day highs and lows within these time intervals can serve as resistance and support levels. Moving averages can also serve as resistance and support levels. For short-term levels, 10-day increments can be used. For example the 10, 20, 25, 30, 40, and 50-day moving averages are typically used to help define possible resistance and support levels. Another effective method for determining resistance and support levels is through the use of Fibonacci Retracement.

At Verdeo Funding, we make use of all of these methods to help us identify resistance and support levels. We keep a close watch on these levels as the bond price approaches them because it is at these levels where reversals in direction most often occur. In addition, our Market Analysis includes making use of the Japanese Candlestick system of trading because we feel this best captures the personality of the mortgage bond market. Within this system, we identify resistance and support levels for you using several different methods and watch for signs of price reversal or change in the direction of trend. Based on these resistance and support levels, we then calculate the "risks" associated with either locking or floating at the current price level. The technical analysis of mortgage bonds provides you with another tool to assist with making timely and effective decisions to "lock" or "float" loans. We feel this analysis gives us a decisive edge over our competitors by allowing us to pass along this expertise to our clients.

For more information, call us today at (877) VERDEO 1

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