Mortgage Rates: To Lock or Not to Lock That is the Question
Information provided by interest.com
There was a time when we knew six months in advance what kind of interest rate we would have to pay when we purchased a home. The rate might vary by a half of a percentage point, if that, but we knew just about what it would be. Also, if it did go up a half a point, we could argue about it. If we were excellent customers of our bank and the banker valued our family and/or business accounts, we could looked pained about the increase and probably come to an accommodation.
Things are different now. Many banks have become part of a global financial network. The neighborhood banker may now answer to a chief financial officer a thousand miles away. The result is that the loan officer across the desk from you may have very little to say about what interest rate you'll be charged. In fact the rate may move up or down a quarter of a point in the time it takes to complete your application.
There are, however, safeguards the loan officer can offer you. They're called rate locks or lock-ins. When a good interest rate appears in the marketplace, the loan officer can secure the rate for you. The lock-in may include both the mortgage interest rate and the
(one point equals 1% of mortgage amount charged by the lender) or just the interest rate--with the points allowed to rise and fall (float). Sometimes both the interest rate and the points are allowed to float until some time after the application has been completed, but they are locked before settlement, or the closing. Whatever kind of lock-in situation you use, it is wise to get the lock-in agreement in writing, since verbal agreements can be very difficult to prove in case of a dispute.In most cases, when a loan officer locks in a rate, all borrower-provided documentation must be given to the lender within a week. This includes pay stubs; w-2 forms or other proof of employment and salary; bank account numbers, your latest bank statement, and your bank branch address; all loan and credit card account numbers, and the names and addresses of your creditors; and evidence such as canceled checks of your mortgage or rental payments.
Locks are available for varying lengths of time, from as brief as 10 days to as long as 120 days, with small increments in the interest rate from the shortest to the longest period. The briefest lock period is only used with loans that have already been approved. Usually such a loan can be handled within ten days. Locks of 30 or 45 days are typically used when your loan officer has most of the information he or she needs and he or she has already begun processing your loan. Usually a competent loan office can complete the processing transaction in 30 days.
Locks longer than 30 or 45 days are usually used when there are external factors that may delay the loan closing. These may involve the need to sell an existing home before the new loan can close on the purchase of another home. On the other hand, they may include a delay in the completion of a new home that is under construction. Since long locks begin to involve greater costs in rates or points, the longer the lock that is contemplated, one should take a hard look at the market, at whether interest rates are remaining rather steady or are going up or down. If the market is declining, you may decide not to ask for a lock-in.
Unforeseen events sometimes turn a loan officer from a hero into a bum overnight. Economic earthquakes elsewhere in the world while Americans are sleeping can and have caused us to awake to a completely different financial landscape in the morning. Faced with a rapid rate increase, lenders may be swamped with phone calls. On the other hand, someone who has locked in a loan may see rates plunge day after day. Recently competition in the loan industry has induced some lenders to offer a "float down option," which would let the rate drop even if it had been previously locked.
Some lenders feel however that the benefits of such an option are limited. Donna Caffiero, an experienced loan officer at Pacific Finance in California's central coast region says, "In my opinion, in view of the fees charged for this privilege, it is often not cost effective." She added that very few mortgage bankers now offer the float down option, and that the few institutional lenders who do, have rates that are often slightly higher than the market. If you want the float down option, be sure to ask your lender if there is a charge for this option and also what the interest rate is.
Terry O'Brien, a broker in San Jose CA, had this to say about mortgage rates: "Find a rate you can live with, lock it in and forget about it. If you chase the market, you may well end up getting hammered."
Everyone needs to play their own game, make their own decisions. You need to decide if mortgage rates are changing fast enough to warrant a lock-in rate or not. If they are, then decide for how long a period you need to lock a rate. Hopefully, with well-considered decisions, your results will be rewarding.
