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Rate-lock anxiety rises with mortgage rates

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.

Long-term mortgage rates remained fairly steady in the last quarter of 2004 and into the beginning of 2005. But they have been rising lately, and borrowers feel nervous, wondering whether they should lock now or wait until closer to the closing date.

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Rate-lock basics
A rate lock is a legal commitment between the lender and the borrower. The lender promises a loan at a specified interest rate. The borrower sometimes promises to pay certain points and fees (especially if the lock is for more than 30 days). 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 implicitly are promising to borrow at the specified rate, even if rates drop.

Deciding whether and when to lock is more art than science because it involves guesswork. The decision depends upon how much you will have to pay to lock, how long you plan to have the mortgage and what you guess will happen to rates.

Many lenders don't charge a fee to lock within 30 days of closing. If you want to lock beyond 30 days, you are likely to have to pay a fee. These fees aren't standardized. They vary from lender to lender and from loan type to loan type, and are expressed as points, where 1 point is 1 percent of the loan amount.

Generally, you can expect to pay from a quarter of a point to a half a point to extend a rate lock for 30 more days. In other words, if your lender lets you lock free within 30 days of closing, you might pay one-quarter to one-half a point to lock for 60 days. A 90-day extension is likely to cost a point, maybe more.

Most lenders combine rate locks with rate caps. A cap is a margin above today's rate. For example, let's say it's mid-March and today's rate for a 30-year fixed is 6 percent. Your closing date is in July. You decide to lock today, paying 1 point. The lender is likely to place a quarter-point cap on the rate, meaning that the rate you eventually pay could be as high as 6.25 percent.

On the other hand, the lender might allow you a one-time "float down" within 30 days of closing. The float-down option lets you grab a lower rate if rates fall between now and then.

Making sure it really locks
Whenever mortgage rates are in an upward trend, rate locks become 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 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.

-- Posted: March 14, 2005




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