Wall Street appeared to shrug off the Federal Reserve's new bias toward higher interest rates this week, but mortgage rate watchers were waving red flags about higher mortgage rates in the weeks to come.

That should be a signal to home buying consumers to take the breather as an opportunity to get those rate locks fastened down.

A day after the Federal Open Market Committee meeting decided to move to a Fed Funds tightening bias, and the possibility of higher interest rates, the bond market essentially took a breather from recent upward yield pressures, but Mortgage-Net.com, Bankrate.com and HSH Associates, among other rate watchers on the Web, still pointed to higher rates in the weeks ahead.

Before the Feds met, some market watchers warned the bond market was becoming susceptible to a hard sell offs in the face of expected bad news in the weeks ahead.

Fannie Mae on May 20 reported 30-year fixed-rate mortgages rose sharply to 7.23 percent this week from 7.10 percent last week. The rate is the highest they've been since Nov. 7, 1997.

"With last week's news of the sharpest rise in CPI in almost nine years, and the Fed's announcement of its bias toward higher interest rates, mortgage rates began to climb," said Frank Nothaft, deputy chief economist for Freddie Mac.

Bankrate.com said while changes in the so-called "long bond" yield don't influence mortgage rates directly, they do suggest whether market-watchers expect inflation to pick up in the months ahead. If bond values fall, yields creep up and along with them mortgage interest rates.

Also, before the Feds met, the bond yield climbed to 5.79 percent -- the highest level since June 9 and Bankrate.com's national average mortgage rate was at or above 7.10 percent for only the second time since May of 1998.

Further upward inflationary pressure came from higher oil prices helping to push up the Consumer Price Index by 0.7 percent, the worst report in more than eight years. Even the so-called "core" rate, which excludes food and energy numbers, rose 0.4 percent, twice the level expected.

In the recent past, mortgage markets have tended to climb ahead of bad news, so consumers might want to take the opportunity now to lock in their interest rates.

What is a rate lock?

A traditional rate lock, also called a "lock-in", is a lender's guarantee that you'll get a certain interest rate, number of points, and other cost-related features, according to Warren Myer, CEO of San Jose, CA-based Mortgage-Net.

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 become uncertain 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 1st 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.

• 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 in the current market.

• 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. 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.

• 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.

• 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: May 21, 1999

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