With Interest Rate Increases on the Horizon, Mortgage
Borrowers Should Lock the Price ASAP
Based on rumblings at the Federal Reserve, the likelihood of
a mortgage price spike in the near future is high. A price
spike will make a mortgage costlier for all borrowers who
are not locked, and unaffordable for some. This article is
about locking a price before the spike hits.
Distinguishing The Types of Mortgage Prices
In the mortgage market, there are
posted prices, fake prices, and lock prices.
A posted price is the price that the lender would lock for a borrower whose application has been approved; they have been “cleared to lock”. Posted prices are delivered every morning to loan officers, telemarketers and other employees or agents authorized to offer the lender’s products to the public.
A fake price is one quoted by a loan officer in order to seduce a price shopper, a practice called “low-balling.” A fake price below the corresponding posted price is never locked. However, under some circumstances a fake price above the posted price might be locked, a possibility discussed below.
A lock price is the price a lender commits to for a specified applicant. It holds for a specified period, which generally ranges from 30 to 60 days. If the loan does not close within the lock period, the lender’s price commitment expires.
protects the borrower against a rise in rates and points
within the lock period, but not during the prior period when
the application is being processed by the lender. If it
takes 2 weeks to approve a borrower’s application, the
borrower won’t be able to lock for 2 weeks. Hence, an
important question to put to any lender you shop is,
What are your requirements to
locking imposes a cost on lenders, they don’t want to do it
unless they are reasonably certain that the loan will go
through. Their inclination is to take the time needed to be
sure. The borrower’s interest, in contrast, is to lock ASAP.
The longer a lock is delayed the greater the risk of an
unaffordable rise in market interest rates, and if you are
financing a home purchase with a set closing date, the
weaker your capacity to back out and seek another lender.
The most troublesome areas are income
documentation and property value documentation, either of
which can take considerable time. The first is most likely
to be problematic if you are self-employed or draw income
from real estate investments. The second is most likely to
be problematic if the property is in an area that is
suffering from a shortage of appraisers. That problem is
sometimes handled by making approval contingent upon an
appraisal being above some minimum value. In such case, it
is important that you judge the likelihood that the
appraisal will exceed the minimum as high.
Once you have been cleared to lock,
do so. Delaying the lock in the expectation that prices
might fall is a bad gamble.
You want to lock the posted price,
not a higher fake price. A borrower who shops and transacts
on the telephone might select a lender based on a fake price
below the posted price, and then lock a fake price above the
posted price. In a volatile market, there is always a
plausible explanation for a different price.
The best assurance that your lock is
at the posted price is that on the lock date you can price
your transaction on the lender’s web site, or on a third
party site such as mine in which the lender participates.
This works with some lenders, not with others. If you have
direct contact with an obliging loan officer, your need
might be satisfied with a hands-on demo of the pricing of
your transaction on the LO’s laptop. A dated printout of the
lender’s pricing might also work. You should pin this down
early on when you select the lender.
Locks should cover the interest
rate, points, and all other lender fees. On ARMs the lock
should include the maximum rate, margin, index and
adjustment caps. The coverage of the lock will be shown on
the lender’s Lock Confirmation Statement, which you should
ask to see upfront.
Cost of the Lock
It is common
to charge a modest fee for processing and locking a loan. On
my site, lenders are allowed to charge $295, which is
non-refundable if the borrower walks but is credited back to
them when the loan closes. The largest investment the
borrower must make is the appraisal, which can range from
$300 to $800 depending on the property. That is not
refundable if the loan doesn’t close because the appraisal
company gets paid whether the loan closes or not.