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Rate locks explained

Dr. Don TaylorDear Dr. Don,
My mortgage broker told me I could not lock in a rate until he had a signed contract. I delivered the contract to his office. When I called the next day to confirm my rate I was told that he was on vacation and wouldn't be back in the office for a week. I told the girl I wanted to lock in, but she could not help me.

When he got back, the rates were up and he told me I had to pay 1 point to lock in where I wanted. I paid half a point then and will pay the balance at closing. Since then rates have continued to drop, is there anything I can do without spending more money?
Bridget Bestrate

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Dear Bridget,
What is required by the mortgage broker to lock in a mortgage rate can vary by state law and by the broker's business practice. If your state or broker requires a written rate-lock contract prior to locking in an interest rate, then that's what needed to happen.

It's not right that he didn't have a way to allow you to lock in a rate while he was out of the office, but there's not much that can be done about that now. You want a written rate-lock agreement because oral agreements aren't very useful if you have to take the mortgage broker to court. It's unfortunate that you lost your rate waiting for the mortgage broker to sign the agreement.

I'm a little confused about your statement that you had to pay a full point to lock in the rate that you wanted. A rate-lock agreement should address both locking in discount and origination points and the interest rate on the loan. Buying down the interest rate by paying more in discount points is an established practice in mortgage finance, but it should be presented that way to the borrower, not that you're paying more for your rate lock in order to get a lower interest rate.

Rate locks are priced based on the number of days that the borrower wants the rate lock to be in effect. Since the rate lock needs to be in effect through the closing date of your loan, bottlenecks in the loan approval process or purchase contract can derail a rate lock. Most rate locks are in the 30-60 day range.

Rate locks are always a guessing game. I'll be the first to tell you that I don't know where mortgage interest rates will be at any point in the future. Read Bankrate's Mortgage Rate Trend Index every Thursday for current thinking on where mortgage rates are headed.

I will tell you that you're better off watching the 10-year Treasury note rather than concerning yourself with the Federal Reserve's next change in short-term interest rates. You can track the U.S. Treasury's 10-year Constant Maturity Yield on Bankrate's Rate Watch page.

A float-down rate lock agreement is a heads-I-win, tails-you-lose approach to locking in mortgage interest rates and would have solved your current dilemma about wanting to finance at a lower rate than your locked-in rate.

With a float-down agreement the borrower gets the opportunity to lock at a lower rate if rates go down, but the lender is held to the original rate if rates go higher. As you would expect, because of this flexibility a float-down agreement is more expensive than a standard rate-lock agreement.

Your rate lock agreement will address the cost to you of breaking that agreement. Read this Bankrate feature on breaking a rate-lock agreement before even considering that step. If you're doing a refinancing you have some flexibility concerning when you close on the loan, but don't expect your current mortgage broker to be wild about the prospect of finding you a new lender.

-- Posted: Jan. 23, 2002


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