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| July 30, 2003 |
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With mortgage interest rates rising so quickly -- more than 0.25 percentage points in the past week -- getting an interest rate that sticks has taken on greater significance. Interest rates have risen nearly 0.75 percentage points since hitting the record rock bottom of 5.21 percent June 12. That rate held for another week before rising for five consecutive weeks to 5.94 percent on July 24, according to Freddie Mac's weekly mortgage rate survey. A rate lock can help hold the line. A traditional rate lock is a lender's guarantee that your mortgage will come with a certain interest rate, points, and other cost-related mortgage features. The lock is good for a specific period -- if you fail to complete your home purchase or refinance before the clock runs out, and interest rates rise, be prepared to pay the higher rate. Unfortunately, if interest rates fall during the lock period you can't take advantage of them unless you rewrite the lock and perhaps pay additional costs. You can also choose a "float down" lock that grants you a lower rate if rates fall within a given window of time. However, with a float down, if rates rise during the lock period, you could get stuck with a higher rate. "On June 25, apparently the last day of the bottom of the market, I could have gotten a well-qualified client a $200,000, 30-year, 15-day lock loan at 4.875 with zero points and a 1 percent origination fee and the principle and interest would have been $1,079 a month," said Roger Harrington, with Roger Harrington's Mortgage Advisory in White Bear Township, MN. "By July 22, that same loan would have been about 5.5 percent and $1,162 per month. The cost of floating would have been about $82 per month," he added. Everything depends on the language of your rate lock agreement. "Each lender has their own policy and sometimes it can even change midstream in your loan process," said Stephanie Noryko a broker with Granite Financial in Cupertino, CA. "If the loan does not close on time, with some lenders they will automatically extend your lock, some will simply continue to extend the lock until the loan closes. Other lenders may give you one free, neighborly extension, but then will not honor another and your loan will go to market at the going rate no matter who is at fault for any delay. Still others, if the lock is not met, will charge you a percentage of the loan amount, say 0.2 percent for a ten-day extension," said Noryko. All the possible forms of a rate lock makes it mandatory that you get your lock in writing -- at the time you receive the lock, not later -- no matter what type of lock you choose. Oral agreements are difficult to prove, should it come to that. The contract should lock in as many of the costs you can, the rate as well as points. The written lock agreement should include: It may be a good idea to set the lock as soon as you see the rate you want. Typically that's "on application" or when you first apply for the mortgage. The on-application lock is designed to lock in the rate as you spend time getting the application approved. "The first thing to consider is your capacity to take the risk of a rise in market rates. If you barely qualify at today's rates and an increase would knock you out of the market, or force you to accept other unfavorable terms, you should lock immediately," said Harrington. On the other hand, if you can withstand a rise in rates you could benefit from delaying the lock and gambling that rates will fall. "If rates stay flat, the consumer with a rate lock loses because of the cost of the lock. The only time a rate lock is good is if interest rates increase by more than about 0.125 percent during the lock period," said Richard Calhoun, owner broker of Creekside Realty in San Jose, CA. "Rates go up and down everyday just like the stock market indexes. So even with the currently higher rates, if someone has a 40-day escrow there is likely a period where rates dip down. If you catch a dip then locking makes sense. The only time lock rates makes sense is if you know that rates will increase or if you cannot afford the higher payments, " Calhoun added. The lock-in period should be long enough to allow for settlement, contingencies imposed by the lender or purchase contract and other factors that could delay the process. Most range from 15 to 60 days and most average about 30 days. Anything longer than 60 days could be cost prohibitive. Consider all factors that could delay your settlement, including the time it will take you to provide requested materials about your financial condition, unanticipated construction delays on a new house and the like. How much you pay will vary among lenders depending upon the length of the lock-in period, the options you choose, and whether the mortgage rate is fixed or adjustable and if it's a purchase or a refinance. "If the lock is about to expire, there may be a "lock extension" available, usually for a fee ( approximately 0.25 percent or 0.5 percent), depending on how much extra time is needed," said Lyn Adams a consultant with Certified Mortgage Specialists in Brookfield, WI. "If rates go down and the rate is already locked, some lenders require a 30-day window before a file can be resubmitted. So again they'd be taking a risk on where rates will be in the next 30 days, or they can start all over with a new lender," Adams said. |
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