This is a great article that really explains the basics about locking in your
mortgage or loan rate...as well as some of the pit falls.
Make Sure that
Mortgage Rate Really Locks
By Holden Lewis
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.
Rate-lock basics
A
rate lock is a legal commitment between the borrower and the lender. The
borrower promises to pay certain points and fees. The lender promises to lend
at a specified interest rate. 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're
promising to borrow at the specified rate, even if rates drop.
This
story is about making sure that you have a rate lock when you think you have
one. Deciding when to lock is another matter, more art than science.
Every Thursday, Bankrate.com publishes the Mortgage Rate Trend Index, in which
mortgage experts forecast whether they believe mortgage rates will rise, drop
or stay the same over the next five to seven weeks. These experts aren't
always right, so weigh their guesses with your hunches and your lender's or
broker's advice.
Ups and downs
Mortgage rates are in an upward trend now, so rate locks are 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 lie. They 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.
Ready to find a
mortgage? Check rates in your area.
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.
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.
Most
mortgage brokers are as honest as the day is long. To keep your broker that
way, 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 this: It
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.
-- Posted: Jan. 24, 2002
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