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When you lock in an interest rate on a mortgage, a spoken commitment is worth the paper it's printed on.
Get your rate lock in writing, in the form of a loan commitment from the lender.
Many mortgage borrowers come to grief because of misunderstandings about rate locks. Some borrowers fall prey to sneaky loan providers; others confuse a rate quote with a rate lock. Some are victimized by bad timing and it's no one's fault.
Long-term mortgage rates remained fairly steady in the last quarter of 2004 and into the beginning of 2005. But they have been rising lately, and borrowers feel nervous, wondering whether they should lock now or wait until closer to the closing date.
Rate-lock basics
A rate lock is a legal commitment between the lender and the borrower. The lender promises a loan at a specified interest rate. The borrower sometimes promises to pay certain points and fees (especially if the lock is for more than 30 days). The borrower and lender (and mortgage broker, if there is one) agree to do their best to close the loan on or before a specified date. If the loan isn't closed by the deadline, the contract expires.
Locks typically last for 30, 45, 60 or more days. The longer you lock, the more likely you'll have to pay a fee for the privilege.
Think of a rate lock as insurance that you'll get your loan at the agreed-upon rate, even if rates rise. The lock protects the lender, too, because you implicitly are promising to borrow at the specified rate, even if rates drop.
Deciding whether and when to lock is more art than science because it involves guesswork. The decision depends upon how much you will have to pay to lock, how long you plan to have the mortgage and what you guess will happen to rates.
Many lenders don't charge a fee to lock within 30 days of closing. If you want to lock beyond 30 days, you are likely to have to pay a fee. These fees aren't standardized. They vary from lender to lender and from loan type to loan type, and are expressed as points, where 1 point is 1 percent of the loan amount.
Generally, you can expect to pay from a quarter of a point to a half a point to extend a rate lock for 30 more days. In other words, if your lender lets you lock free within 30 days of closing, you might pay one-quarter to one-half a point to lock for 60 days. A 90-day extension is likely to cost a point, maybe more.
Most lenders combine rate locks with rate caps. A cap is a margin above today's rate. For example, let's say it's mid-March and today's rate for a 30-year fixed is 6 percent. Your closing date is in July. You decide to lock today, paying 1 point. The lender is likely to place a quarter-point cap on the rate, meaning that the rate you eventually pay could be as high as 6.25 percent.
On the other hand, the lender might allow you a one-time "float down" within 30 days of closing. The float-down option lets you grab a lower rate if rates fall between now and then.
Making sure it really locks
Whenever mortgage rates are in an upward trend, rate locks become increasingly important. You take a risk if you apply for a loan and decide to float -- to not lock in a rate. But the risk isn't huge because rates fluctuate from day to day and even hour to hour.
Aware that rates fluctuate, unscrupulous brokers have been known to tell borrowers that they have locked in a rate with a wholesale lender when they haven't. If rates drop, these dishonest brokers can secretly lock at the lower rate and reap a covert profit after the loan closes.
If rates rise, the broker takes a reduced profit or even a loss. Or the broker can delay things until the rate lock expires.
Sophisticated brokers can play this game and leave the borrower none the wiser, says Bill Lavigne, a consultant who audits mortgage companies for compliance and licensing issues. "Now, many argue this isn't possible and it's not done because it's against the law, but I have seen it with my own eyes dozens of times," he says.
Lavigne adds the lying-about-the-lock trick doesn't happen as often as it used to because brokers are being regulated more closely. However, regulations vary greatly from state to state -- and some states don't regulate mortgage brokers at all.
Trust, but verify
Brokers are middlemen who have access to many sources of credit and can pick out the best available deals for their clients, whatever their credit histories. A loan officer at a bank has fewer sources of credit to choose from. About 70 percent of borrowers get their mortgages through brokers.
To keep your broker honest, tell the broker upfront that you want to see a loan-commitment letter as soon as possible after you lock.
The letter should have your name and the lender's name, and it should specify the interest rate, any points and rate-lock fees, the date the rate was locked, and how many days it will be locked.
If the broker balks, walk, Lavigne advises.
Jim Bradley, president of American Residential Lending Corp. in Atlanta, is always ready to produce the loan-commitment letter. First, though, comes the rate-lock sheet, which is not the same as the loan-commitment letter.
"I have a form that I make my borrowers sign," he says. "The form says that they acknowledge that their options are one of two things -- they'll either float with the market, and they'll check that and initial it, or they'll lock in. They'll check that and initial it."
If the borrower chooses to lock a rate, "I tell the folks in order to get this to you in writing I will fax the lender and get a commitment."
Bradley asks for a check to pay third-party fees for items such as credit reports. He then gets to work finding a lender and locking in the rate and terms. When he does, if the borrower wants to see the commitment letter, it's there in black and white.
Change happens
Lots of brokers quote rates and terms over the phone. A rate quote over the phone is not a rate lock.
Sometimes brokers are whipsawed by rate changes beyond their control. Bradley makes house calls, and when he offers to lock in a rate and terms, "I tell them, 'Look, what I'm telling you now is subject to whatever the rate is when I get back to the office.'"
Occasionally, Bradley drives to his office only to discover that lenders have raised rates in the middle of the day. He calls the client back.
"I tell them, 'I'm sorry, the rate went up between the time I saw you and got to my office, and that's what I'll have to charge you," Bradley says.
Then the borrower has to decide yet again whether to float or to lock.
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