Question: A month ago, I made application to refinace my home. The appraiser has been out to inspect the property and the application process seems to be going smoothly. I had decided to float my interest rate because I think they will continue to drop. This strategy had served me well up until last week when rates started shooting up. My loan officer and I exchanged phone calls twice last week. When I finally spoke with him, I learned that rates have risen by three-eights of a percent and that I wasn't locked in. I would have thought that my loan officer would have locked my rate when the rates beagn to spike up. Now I'm stuck with a higher rate when I could have locked in earlier if we had actually spoken. Do you think the loan officer could have prevented this?

Answer: Sorry. In the middle of what is surely the Mother-Of-All-Refinance Booms, it is unreasonable to expect the loan officer to lock a rate without your permission. I get the impression that he wasn't ignoring you because you exchanged phone calls. Perhaps you should have left a detailed message. What about e-mail?

If your loan rate is floating, all the loan officer can do is lock your rate when you give him your blessing to do so. He can then issue you a written lock agreement that will confirm your terms.

It's important that all homeowners understand that mortgage rates can turn on a dime. Rates can shoot up the same way the stock market can go into a free fall. So it's very difficult to predict these things ahead of time. And as I said, the mortgage industry is completely innundated with applications so your loan officer will be a bit slower in returning phone calls. He probably has dozens, perhaps even hundreds, of applications in process with locked rates. These locks don't last forever. During these busy times, most good loan officers will lock interest rates for a minimum of 45 days to ensure that the application can get processed and the loan can close before the lock expires. And he is probably scrambling to get all his loans closed.

Let me tell you why a loan officer shouldn't lock a rate without the permission of the borrower. What if the loan officer notices that Treasury bond prices are falling. This is an indication that mortgage rates could rise. He takes the liberty of locking the rate without authorization by the borrower.

Subsequently, rates do indeed rise and the loan officer boasts to the borrower that he locked the loan at the lower rate.

Everything would be fine unless the market comes back. What if rates fell sharply in the next couple of days? The borrower will be upset because his loan was locked without his authorization.

I usually recommend locking a rate at the earliest practical time. This is based on one firm belief -- no one can accurately predict interest rates over the short term. Therefore, if you can save some money by refinancing, lock the rate and get the deal done.

Published: November 5, 2002

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