Preparation and patience are essential in this busy mortgage market
By Michael D. Larson • Bankrate.com

Until early January, finding a great mortgage was like shooting fish in a barrel. Rates were plummeting weekly, and lenders weren't that busy because many potential borrowers (especially those who don't visit certain Web sites frequently enough!) didn't know a rally was under way.

Now, the situation is different.

Mortgage rates seem to have stabilized, and for the past few weeks they've been bouncing up and down around 7 percent. That's because the bond market, which was ambushed by the dramatic economic slowdown at the end of 2000, has adjusted to reflect slower economic activity. The Federal Reserve Board's aggressive interest rate cuts have prompted some investors to bet an economic rebound is right around the corner, too. They have pulled money out of bonds and put it into stocks. That hurts mortgage rates, which generally rise when demand for bonds slackens.

At the same time, people unaware that Fed cuts don't necessarily impact mortgage rates (and this is a large percentage of the population, based on some of the feedback I've been getting) started flooding lender phone lines on Jan. 3 when the Fed surprised the world by slashing rates. That deluge has continued ever since, catching lenders, who until recently were firing workers amid a demand slowdown, off guard.

So not only have rates stopped plummeting, but loan-processing times have increased. Mortgage hunters should adjust to this new reality in two ways.

One, realize that rates may not drop as low as they did in October 1998. Thirty-year mortgages dipped below 6.5 percent at the time, but they may not plumb those depths again because of the recent Fed moves and the Bush administration's push for drastic tax cuts. Both have boosted investor optimism about economic growth in the months ahead, effectively putting a "floor" under interest rates that will only give way if the outlook deteriorates further.

Secondly, expect hassles and problems at the lender's office, and adjust your shopping strategy accordingly. House hunters should get pre-approved rather than just pre-qualified for a mortgage before venturing online to find their perfect home, for example. A lender formally assesses a borrower's credit, income and debts in a pre-approval, rather than just informally reviews them the way it does in a pre-qualification. As a result, pre-approved borrowers are much further along in the loan processing food chain. That lessens the chance they'll face lengthy closing delays and lose the house of their dreams to a buyer who already has a mortgage lined up.

Consumers may also want to consider locking their rates for a longer period. While it's true borrowers can get better rates when they choose shorter lock periods of, say, 15 days rather than 60, doing so could leave them exposed to the whims of the interest rate market if lender-processing delays make it take longer than two weeks to close. Rates aren't expected to rise much, if at all, in the foreseeable future, so the risk of that happening is small, but it remains a possibility.

Good luck.