With interest rates breaking records every week, there's a natural urge to gamble they'll go lower still. Without some kind of ''rate-lock,'' however, that could be a losing bet.

Even as Freddie Mac reported on Oct. 8 that average fixed-rates on 30-year conforming mortgages had dropped to 6.49 percent -- the lowest rate since 1968 and the sixth consecutive record decline -- world economic turmoil was pushing mortgage rates back up.

''First we had the Japanese market go up about 6 percent two days ago. This caused a crash in the bond market in the U.S. yesterday (Oct. 7) as money flowed out of U.S. treasury bonds. Rates jumped about 0.25 percent yesterday. (Alan) Greenspan's (Federal Reserve chairman) commented that he was going to cut rates more later, but that did not make a difference,'' said Warren Myer, CEO of San Jose, CAlif.-based Mortgage-Net.

''We had more increases today (Oct. 8) up another 0.25 percent. The U.S. dollar has fallen dramatically against the yen. With rates this low they may have no way to go but up. Those who haven't already locked could be sorry,'' Myer added.

What's a rate lock?

Myer refers to a traditional rate lock, also called a ''lock-in'', which is a lender's guarantee that you'll get a certain interest rate, number of points, and other cost-related 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 pay additional costs.

Still, the lock is a relative safe bet, especially when rates are bouncing around as they are now.

To play for higher stakes, you'll have to pay and accept a greater risk.

A ''floating'' or ''float down'' lock grants you a lower rate if rates fall within a given window of time. You lose, however, if rates rise during the period.

''What often happens is there's a lock-in agreement and then another form for the float down that would specify the terms and conditions of the float down,'' said Diane DeMarco, vice president of marketing for 1s Nationwide Mortgage in Frederick, Md.

''The period of time during which you can lock with a floater is so many days before closing or some other period. It's not a free for all. It's pretty well defined,'' DeMarco said.

Locking down the locks

• Whatever lock you choose, get the guarantee in writing. Oral agreements are difficult to prove should it come to that.
• Unless your contract says otherwise, a rate lock could also prevent you from taking advantage of lower rates, should rates decrease.

''It's locked in at whatever it's locked in at,'' said DeMarco.

• Lock in as many of the costs you can, the rate as well as points.
• If you see a rate you want, set the lock ''on application'' rather than ''on approval.'' On approval means you won't have a stab at rates until the loan application is approved. That could be weeks away and rates could change unfavorably just as they have in recent days.
• Shop around for both the terms of the lock contract and its cost. Some lenders may charge you an up-front, non-refundable fee should you withdraw your application, if your credit is denied, or if for some other reason you don't close the loan. Others might charge the fee at settlement. The fee might be a flat fee, a percentage of the mortgage amount, a fraction of a percentage point or a higher interest rate. Some lenders offer the service at no cost.

''We don't charge a fee for locking in. That's our policy, but there is a fee for a float down option,'' DeMarco said.

In any event, how much you pay will vary among lenders depending upon the length of the lock-in period, the options you choose, and whether to mortgage rate is fixed or adjustable and if it's a purchase or a refinance.

• 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. Anything longer could be cost prohibitive.
• Before deciding on the length of the lock-in, find out the average time for processing loans and ask your lender to estimate (in writing, if possible) the time needed to process your loan. 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.
• Consider current market conditions as well. Right now mortgage lenders offering competitive rates are flooded with mortgage applications.

The Mortgage Bankers Association of America reported Oct. 7 that mortgage applications were up more than 150 percent from last year and that's likely creating a backlog, lengthening the normal processing time.

That's especially true for some of the new Web-based mortgage operations, originally small brokers that have become over night, bogged down sensations.

Once you lock-in a rate, you must make sure that your loan is approved and closed before the commitment expires. Submit a completed loan application to your lender as soon as possible. Follow up to make sure that any additional documents required by the lender (pay stubs, savings and investment account statements, etc.) are sent without delay.

''Sometimes in a declining rate environment, when rates go down they do try to get out of the lock for the lower rate. People should look at it as a contract. They expect the mortgage company to follow through with their end of the bargain. Consumers need to feel the obligation to carry through with their end,'' DeMarco said.

Finally, if you have a floater lenders are too busy to monitor rates and it's up to you to keep an eye on the market. One way is to park your Web browser on the mortgage rate watching sites including Mortgage News Service , HSH, and Quicken Mortgage, among others.

Published: October 9, 1998

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