August 12th, 2011 8:14 AM by Richard T. Cirelli
HOW RATE-LOCKS WORK
The volatility and improvement in the financial markets this week makes me want to talk about Rate Locks today.
First of all, understand that mortgage rates change every day and throughout the day. Lenders allow us to lock in our borrowers interest rates in order to protect them from potential increases in rates between the time they make application and the time the loan closes. At the same time, a rate lock protects the Lender and allows them to manage their pipeline of pending loans to try to minimize losses from loans that don’t close. So, it’s a two-way street in that once a rate is locked the Lender can’t raise the rate before the loan closes or the lock expires and they also won’t lower it if rates eventually fall (see the paragraph about exceptions near the end of this article). It should be understood that a Lender will lose money when a rate lock is broken because they “hedge” their pipeline by buying securities that move in the opposite direction of interest rates. They also incur a cost when they substitute one loan for another in their pipeline.
Rate locks are always for a finite period of time. Most lenders will offer a rate lock in 15-day increments, i.e., 15, 30, 45 & 60 days. The longer the lock-in period the higher the cost because the lender is at risk for a longer time period when guaranteeing a rate.
When Can the Rate Be Locked?
A rate can be locked anytime during the process. In a “purchase” transaction it can be locked in once the buyer and Seller have a signed purchase agreement and escrow is opened. On a “refinance” transaction it can be locked in once the borrower has me an application and signed an “intent to proceed” with a Lender or mortgage broker.
Since rates can change daily, timing is all-important. It’s not always best to lock in the rate at the time of loan application. An experienced mortgage broker has resources that track the movement of Mortgage-Backed Securities and receives “alerts” when the time is best to lock in. It’s not a perfect indicator of when to lock but an experienced mortgage broker will manage his pipeline according to closing dates, the lenders he has chosen to work with the best interest of the client always in mind. The big banks on the other hand tend to lock all loans at time of application which is not often the best time to lock.
Can a Rate Lock Be Broken?
As a general rule, a rate lock is a commitment for both the Borrower and the Lender. But, sometimes there are extenuating circumstances such as the substantial decrease in interest rates such as we just experienced. When that happens, Lenders may allow us to “negotiate” the rate to the market-rate or somewhere between the market rate and the locked rate. The lender has to evaluate how much it will lose if it negotiates the rate and the borrower has to evaluate whether it’s worth the hassle of starting over with another lender. Each lender has the ability to set its own policy for rate negotiations and most lenders won’t negotiate the rate until the loan is ready to close. You can’t expect them to negotiate every day as the markets change. A rate negotiation is usually a one-time opportunity.I welcome your feedback: email@example.com
Mortgage Rate Update: Rates are at an All-Time Low!
In all my years I don’t think I’ve ever seen such volatility and swift movement in the mortgage market. There are so many factors at play – a weakening U.S. economy; multiple European countries in financial trouble and then the down-grade of U.S. debt by S&P.
The Fed met this week and promised to keep rates lower for the next two years. The Fed is essentially out of bullets that they believe will help revive the economy and lower unemployment. There are a number of analysts believing the Fed will do another round of quantitative easing later this year. I believe what Bernanke did is to assure investors rates will stay low and that putting money in treasuries won't provide much, if any, return on parking money. Investors will continue to look for any potential to earn some profits and that makes stocks more attractive. Bernanke's decision will keep interest rates low and likely keep the stock market from collapsing. I think it was an excellent strategic decision by Bernanke and the Fed.
Important Note: The Fed does not control mortgage rates. Most mortgages are sold to Fannie Mae and Freddie Mac and then bundled with other mortgages and re-sold as Mortgage-Backed Securities. These securities are traded in the financial markets just like stocks and bonds. Volatility will continue as the price of these securities goes up and down in reaction to the day-to-day political and economic events.
You can always find out what’s driving the movement in interest rates and whether to lock ro float by following the Rate Lock Advisory that is updated on my website every day: