Get A Grip, Lock That Rate

Rate locks are key to keeping the lid on lending costs when interest rates begin to take off -- as they have for the past month and a half.

Since Sept. 8, when the average fixed interest rate on 30-year conforming mortgages was 5.71 percent, rates have risen for six consecutive weeks, adding 0.39 percentage points to the average.

That pushed the average mortgage interest rate to 6.10 percent on October 20, according to Freddie Mac's Weekly Primary Mortgage Market Survey.

The six-week run up in prices was the longest sustained week-after-week increase in average interest rates since spring of last year when rates rose for eight consecutive weeks. From 5.38 percent in March 2004, they rose to 6.34 percent by May, 2004.

What's more, the 6.10 percent average rate is the highest it's been since July 1, 2004 when it averaged 6.21 percent, Freddie Mac said.

"Anytime rates go up, rate locks are an issue. If you don't lock in your rate, then your rate is floating with the market," said Jack Guttentag, the "Mortgage Professor" and finance professor emeritus at the University of Pennsylvania's Wharton School.

A traditional rate lock is a lender's guarantee that your mortgage carries a specific interest rate, points, and other terms.

The lock is good for a specified period -- if you fail to complete your home purchase or refinance before the clock runs out, and interest rates rise, brace yourself for a higher rate.

If you qualify for a given rate as the maximum the lender will allow you, and interest rates rise during escrow, you could have to add cash to the deal, be priced out of the market or have the lender turn on you.

"This is mainly a problem with a home purchase because a home buyer has so much at stake and is at the mercy of the market price as defined by the loan officer. If you get to closing and find someone has been playing games and things are not what you agreed to and you don't have a rate lock, you are in a vulnerable position. If you are refinancing, you have options, at least in principle. You don't lose the house if you don't close on the scheduled date," said Guttentag.

If interest rates fall during the lock period you can't take advantage of the lower rate unless you rewrite the lock and perhaps pay additional costs.

The exception is a rate lock with a "float down" option to grant you a lower rate if rates fall within a given window of time. Again, unless specified otherwise, float downs stick you with the higher rate if rates rise during the lock period.

While most locks are designed to protect borrowers from rising rates, but everything depends on the language in the rate lock agreement.

Get it in writing

"There are two kinds of locks. The written lock and the verbal lock. If it's a verbal lock they'd better be your best friend. When rates go up, if he or she didn't lock it in with the lender you are out of luck. If you are going to be careful say, 'Could you write this down?' said Earl Peattie a mortgage expert from Hartford, CT.

In some cases, if the loan doesn't close on time, lenders may automatically extend your lock, say until the loan closes, but that's an option that's less likely in a rising rate market. Other lenders may give you a temporary extension and you'll have to pay fees beyond that. Still others may charge you a percentage of the loan amount for the extension.

The many scenarios make a written contract mandatory!

The contract should lock in as many costs as possible, the interest rate as well as points. The agreement should include your name; the lock's effective date; the agreement's effective date; lock cost, if any; what rate and other loan terms are locked; the lock's expiration date and time; and any post-lock options.

Lock as soon as you see the desired rate or "on application" -- when you first apply for the mortgage -- so that your rate is locked as you spend time getting the application approved. That's particularly important if you barely qualify at today's rates and an increase would make buying unaffordable.

"(Without an agreement) Some lenders set the rate when the loan closes. When rates are going up, this is something your certainly want to pay attention to. Otherwise it could cost you $10,000, $15,000, or $20,000 (over the course of the loan), easily," said Peattie.

Lock periods should be long enough to allow for settlement, contingencies, and other potential delays. Locks average 30 days, but range from 15 to 60 days.

Before choosing a lock-in period, determine the average time for loan processing. Ask your lender to estimate the time necessary to process your loan.

Once you lock-in a rate, make sure your loan is approved and closed before the commitment expires. Quickly submit the application and other required documents.

Locks cost money. Shop around for both the terms of the lock contract and its cost. Some lenders charge an up-front, non-refundable fee even if the loan doesn't close. Others might levy the fee at settlement. The fee could be a flat fee, a percentage of the mortgage amount, a fraction of a percentage point or a higher interest rate. The cost could vary depending upon the length of the lock-in period, the options you choose and mortgage program.

If you have a floater, it's up to you to keep an eye on the market.

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Written by Broderick Perkins for Realty Times

October 24, 2005