At some point during the mortgage application process, the borrower must exercise their agreement with the lender to lock in the rate for their final mortgage.
What is a Mortgage Rate Lock?
A Mortgage Rate Lock protects the borrower from the risk that interest rates will increase during the rate lock period. It guarantees that the lender will offer the borrower a specific combination of interest rate, points or interest rate credit at the closing of their loan.
If market rates rise after the rate is locked, the borrower will still get the lower rate, to the lender’s detriment. But there’s a downside: If rates fall after the rate is locked, the borrower might not be able to take advantage of that opportunity.
When Can a Mortgage Rate be Locked?
Buyers typically must wait until a seller has accepted their purchase offer for a specific property before they can lock in an interest rate for their mortgage. In addition, the lender must have certain information about the borrower and the details about the transaction before a rate can be locked. This includes receipt of all signed legal disclosures, the borrower’s credit score, anticipated loan-to-value ratio, property type and the borrower’s signed intent to proceed with the transaction. Until all pieces of the puzzle are in place, the lender can not accurately commit to any final interest rate, cost and terms.
How Long Can a Mortgage Rate be Floated?
When a mortgage rate is locked depends on the borrower’s tolerance for risk. The purchase and sales contract dictates when the loan must close. The borrower may opt to let the final mortgage rate ride or “float” with the market until they feel they can get the best deal. Of course they run the risk that the market will turn in their time period and rates will rise from current conditions.
A good mortgage loan officer may have, in good faith, projected a final mortgage rate for processing purposes, but the mortgage application cannot be approved until the final rate has been locked in.
In today’s mortgage processing environment, a mortgage rate could be floated until about 14 days prior to the prescribed closing date. This should give the lender to deliver the final disclosures, the underwriter time for a final review of the application and to issue a “clear to close,” and time for the closing deportment time to deliver closing package to the closing agent.
Should You Choose a Longer Rate Lock Period?
Borrowers are well advised to choose a 45 to 60 day rate lock period to ensure they can get the agreed upon rate even if there is a delay in processing their mortgage application. If a loan fails to close within the rate lock period, the borrower will charged the higher of the original lock and the current interest rate. If rates are higher, the borrower may be offered the opportunity to extend the original rate at a cost of 0.25 points for each 7 day period. (A point equals 1.00% of the base loan amount)
How Much Does a Rate Lock cost?
Most lenders will not charge for a Mortgage Rate Lock. . But a rate lock isn’t free. Rather, a longer rate lock typically involves a higher interest rate, which is more expensive for the borrower. The interest rate or “pricing” difference between a 15-day rate lock and 60-day rate lock might be as little as one-eighth or could be as much as half of a percentage point. The longer period protects the lender from potential market deterioration. The shorter the rate lock period, the more risk the borrower is taking on, but they should be getting a better price.”
No Mortgage Loan officer is an interest guru. But he does understand the lender’s commitment to you and will do his best to honor the rate lock obligation. However, the complexity of your application and issues like: failure to provide additional documentation in a timely manner, appraisal concerns, possible title problems all add time to the process.
There is rarely a reason not to lock a loan as soon as you can. Interest rates change daily, sometimes hourly. To protect yourself against the volatility of the marketplace, it’s a good idea to lock your rate once you are satisfied with the rate. The reason some buyers dislike loan locks is because they want to grind every dime out of a transaction that is humanely possible. Just remember that if the rate was acceptable when it was locked three weeks ago, a drop of an 1/8 of a point or so isn’t the end of the world. You don’t need to be that kind of borrower to get a good deal.
During every conversation with a new client, the question always comes up: So what are your interest rates?
My stock answer is usually: “Mortgage rates are subject to change on a daily basis and can change again at any time during the day depending on changes in market conditions. Typically, a borrower’s rate cannot be “locked” until a complete application file has been submitted to a lender for review. Any rate quoted today may or may not be what can be offered at that time.”
Granted, that is a pretty simplistic answer to a very important question. I am prepared to answer it in more detail because it does not really answer the underlying question of: What Are the Market Conditions That Make Mortgage Rates Go Up and Down?
The Stock Market
This is the easiest benchmark to follow. In general … What’s good for your 401k is not good for mortgage rates.When the stock market indexes go up, mortgage rates typically go up. When the
When the stock market declines, investors are looking for a safer place to put their money. Mortgage Backed Securities are one of these places. When the demand for these bonds goes up, so does the price. When the price of MBS increases, mortgage rates typically go down.
Conversely, when the stock market increases, investors pull their money out of the bond market causing prices to drop. As prices of MBS drop, the market has to pay a higher return to retain investors and mortgage rates will increase.
Economic Data Mortgage Rates reflect the relative strength or weakness of the overall economy on a daily basis. Rates will go up if the unemployment rate goes down and there is a better than expected economic data. Rates will go down if jobs and manufacturing is stagnant or on the decline; and when housing reports are weaker than expected.
Inflationary Pressure Low interest rates depend on low inflation. High inflation causes wages and prices to rise and the cost of borrowing to get more expensive. Good news for the economy is often bad news for Mortgage Interest Rates.
The Federal Reserve By controlling the flow of cash through the economy, the Fed attempts to keep inflation under control. The Fed’s bond-buying stimulus package added cash into the monetary system in hopes of creating a looser credit environment and an attempt to stimulate the economy with low borrowing costs aka mortgage rates. Their decision to pull money out of the system by pulling back on this package indicates they feel the economy is expanding and they anticipate inflation in the coming months.
Geo-Politics Investors turn to the U.S. markets when things go wrong in their part of the world. The relative stability of our financial markets provides a “safe haven” for their money in times of global crisis.So when you watch TV and see acts of terror or conflicts in the Ukraine, you might see Mortgage Rates go down. However, if there are reports that China’s economy is improving or Mid-East tensions are easing. Mortgage Rates can be expected to go up.
Other World Events Let’s talk about the weather! What’s bad for the world is good for mortgage rates. Tsunamis in Japan, earthquakes in South America attract investors to our markets for safety. This flood of money puts upward pressure on bond prices and push mortgage rates down. A serene weather picture around the world could push rates up.
Now I’m just a small broker doing what’s right for my clients. I’m not an economist, nor do I have a crystal ball that enables me to tell anyone where mortgage rates are heading in 2014. But I have been challenged by senior bank executives across this country to look at the big picture when making small decisions that affect peoples’ lives. As my testimonials will confirm, all I can promise is that I will do my best to provide my clients with the Right Mortgage at the Right Rate for thier family situation.
Something Other Things To Consider.
In addition to market conditions, any borrower’s interest rate is determined by many other factors including: type of loan, loan program, loan purpose, down payment or equity, and credit score. The interest rate one sees in newspaper articles is available to borrowers seeking a conventional mortgage with a 740+ credit score, have a 20% down payment or equity in their home, probably pay 1 point and is able to pay all closing costs. If a borrower’s real life situation differs from any of these criteria, lenders will perceive this as additional risk in the application and adjust the interest rate accordingly.
The stock market was in turmoil last week trying to make sense out of the Obama Administration’s euphoria over the latest employment report. Now I’m just a mortgage broker trying to “help families live comfortably and financially secure in their own home.” but the Jobs Report Math Doesn’t Add Up. Here’s is the math as I see it, just over 160,000 found jobs in July, that’s a plus; but 250,000 stopped looking for jobs; a net loss of 110,000 jobs! Plus … more people are working part-time due to lack of work or are being employed part-time so that employers will not be forced to pay for their health insurance because of the ObamaCare laws that go into effect next year. And this is good for the economy?
The Jobs Report signals when Federal Reserve might reduce its bond-buying efforts that have kept a lid on interest rates. But when the Fed reduces it stimulus and interest rates edge up, and the pent up demand for scarce inventory pushes home prices up, there is concern that the real estate market may cool down.
Ben Bernanke says the Fed will know when the economy is back to normal once the unemployment rate goes below 6.5%. I guess that if enough Americans leave the work force or have to settle for being under-employed, we’ll be back to normal(!?)
The only math that adds up is that the policies of this Administration have been a total disaster when it comes to economic recovery.