Mortgage lock-in agreements are back in vogue with rise in interest rates

July 26, 2013

After the recent rise in mortgage interest rates, home buyers may want to know how to lock in a rate — and for how long.

With a volatile interest market and intense competition for housing, lock agreements are again in vogue, lenders say.

To launch a lock-in agreement, they must have a signed purchase contract. “The moment that you have a ratified contract and a date for closing is the second that you and that mortgage person become Siamese twins,” said Ellen Davis, a senior mortgage loan originator at Columbia-based Corridor Mortgage, who worked as a mortgage broker for almost 25 years.

Interest rate locks are especially important for a first-time buyer who just barely qualifies for the mortgage or for someone taking out a jumbo mortgage because their payments will increase significantly with even a quarter-point gain. The biggest mistakes borrowers make is not locking in or in thinking they can time the interest rate market to land the lowest rates, said Malcolm Hollensteiner, regional director of retail lending sales at TD Bank.

About half of prospective home buyers were not aware that mortgage interest rates fluctuate through the day, according to real estate firm Zillow, which estimates that a third are not prepared to shop for a mortgage. Mortgage rates started inching up in May and jumped about a half-
percentage point in late June to a two-year high of 4.51 percent for a 30-year loan after Federal Reserve Chairman Ben S. Bernanke said that the Fed may taper off bond purchases. Since then the rate has eased back to about 4.31 percent — still a full percentage point higher than in early May, according to Freddie Mac data.

To protect against higher rates between the time you apply for a mortgage and closing day, when it is funded, lenders offer rate locks, or lock-in agreements. Lenders’ locks come with a wide variety of terms and details, said Erin Lantz, director of Zillow’s Mortgage Marketplace.

The “standard” term varies depending on the lender and type of loan, from 30 to 60 days. That can be extended by paying a fee for 90 days, and as long as 180 days of rate guarantee if the buyer is getting a newly constructed house or condominium, Hollensteiner said. Many lenders do not charge extra for a basic lock, but some do expect borrowers to pay a fee of a few hundred dollars or a small percentage of the mortgage amount, especially on smaller loans or longer-term locks.

Lenders are required under federal guidelines to lock in the interest rate about three days before closing, he noted. Before that, especially in recent years as rates have been stable or trended lower, some borrowers have chosen to “float” their rate — or not have the rate set for a period of time.

In recent weeks, borrowers have become more focused on getting locked. They can lock in at any time during the mortgage approval, Hollensteiner said.

What’s almost impossible to do is choose the exact right moment when rates are lowest to lock in. “You can make yourself crazy trying to find that one-eighth of a point in today’s market,” Davis said. “If the rate is good, if it meets your goals and meets your needs, lock it in.”

So how long should your lock last? The average mortgage on a home purchase took 45 days to close in May, three fewer days than six months ago, according to Ellie Mae data based on a robust sample of one-fifth of all mortgage originations. (Refinancings closed in 44 days on average, down from 51 days six months earlier.)

Given that the summer is full of vacations, you may need to add a few days to complete home inspections, an appraisal and more, Davis said.

Buyers can make locking easier by gathering tax returns, bank statements and other paperwork as they are shopping for a home. “That way you’re ready to lock and apply once you find the home,” Lantz said.

So what happens if the mortgage is not closed during the lock-in time? The answer depends partly on who is to blame and partly on lender policies on extending the lock.

If it’s the lender’s fault, the lock is more likely to be extended without charge than if the buyers dragged their heels or didn’t bring in all the documentation.

Ask the lender what its policy is on an extension and how much it will cost to add to the lock period. With the refinancing boom “effectively ended,” most lenders should have more capacity to complete mortgages relatively quickly, said Guy Cecala, publisher of Inside Mortgage Finance, a trade publication based in Bethesda.

What happens if your loan doesn’t get approved by the underwriters? Ask whether the lock fee is refundable and under what circumstances you could get your money back. Most lenders will refund if they deny the loan.

Because Cecala thinks the odds are 50-50 that rates could ease down as much as increase in the next month, buyers need to understand whether the lender will “float down” a locked-in rate just before closing.

Vickie Elmer is a freelance writer.

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