What Is The VIX And How Does It Predict Mortgage Rate Volatility?

Mortgage rates are a by-product of the mortgage bond market and, like everything else on Wall Street, they are subject to speculation.

In general, when the economy is expected to expand in an orderly fashion, money often chases risk. It flows from the bond market to the stock market.

By contrast, when the economy is expected to slow in an orderly fashion, money often avoids risks. It flows in the opposite direction; from stocks to bonds.

In the absence of expectation, though, an abundance of questions arise. Or maybe it's the other way around -- an abundance of questions clouds the expectations of the future.

When the Wall Street market has close to no expectation for the economic road ahead, traders have little to do but second-guess each other. It creates unrest, uncertainty, and a whole lot of fear.

The chart above tracks the Chicago Board Options Exchange Volatility Index -- a statistic known by the acronym "VIX", and more commonly called "The Fear Index". When the VIX is climbing, it means that markets are getting more volatile.

We've seen how quickly the stock market can change. Mortgage markets change with the same velocity. And when they do, they take mortgage rates along for the ride. Last month, for example, when the VIX hit its peak, there was a day in which rates changed five separate times.

It nearly happened a second time just before Thanksgiving.

Lately, mortgage markets are on edge and uncertain. Despite -- or because of -- constant congressional stumping, serious questions about the economy remain unanswered. Until they are, traders will shift in and out of securities and mortgage rate shoppers will feel the pain.

If you're taking advantage of the new Refi Boom, grab the first rate you see and lock it if you like it. Because until the VIX recedes into the 20s, not locking will continue to be a gamble.