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Now's a good time to lock in your
rate -- before they head even higher
By Michael
D. Larson • Bankrate.com
 Jasminka
Ilich-Ernst locked in her mortgage on Nov. 2. The next day, rates
started dropping.
And dropping.
"Before, the rates were a little higher and
then they came down. That's why I thought even if they come down
further, it won't be so much," says the University of Connecticut
professor. "For that time, it was good, but now the rates with everyone
else are lower, so now it's not such a good deal.
"You never know," she adds. "You can never completely
trust anything and anything can happen in the meantime."
Wrong
side of a rate lock
Ilich-Ernst isn't the first mortgage hunter to get caught on
the wrong side of a rate lock and she won't be the last. But consumers
have a lot more than financial market trends to worry about at commitment
time. Locks that don't last long enough or cost more than they should
can drive up the price of a mortgage. And with rates looking to
head higher, experts say that now's the time to learn about what
to avoid.
Most home shoppers understand the basic
function of rate locks. They allow consumers to obtain rate
and points commitments on their mortgages between the time of application
and closing. By ending their "float" period, borrowers don't have
to worry that a rise in market rates will make their financing more
expensive.
A
dangerous -- and costly -- assumption
Mortgage lenders and brokers usually offer short-term locks
for free. As a result, borrowers may just take the easy way out
and assume they're covered. The state of the housing and mortgage
markets, however, makes that a dangerous move.
Skilled workers and certain construction materials
have been tough to find, thanks to the tight labor market and production
problems. That has caused several builders to miss the delivery
dates they promised to home buyers, pushing mortgage closings beyond
the 60-day rate lock periods that were supposed to be sufficient.
Because new home contracts usually don't come with rate guarantees,
a borrower in that situation ends up paying the newer, higher market
rate without any way to recoup the added cost.
In addition, recent data suggests financial
institutions are taking their sweet time with regular mortgage closings.
The average home loan took 40 days to complete as of late October,
according to a Bankrate.com survey of banks and thrifts in
four major metropolitan markets. That means a basic lock, such as
the 45-day version typically offered by mortgage brokers, might
not offer consumers enough protection against rising rates.
Longer-term
locks are available
What can home buyers do? For starters, they might want to consider
longer-term locks. Most lenders offer commitments that go as far
out as 90 or 180 days, and some companies will lock rates for up
to a full year. As a general rule, the longer the lock term, the
more it will cost the borrower and the less protection it will offer.
But it may be better than being fully exposed to the whims of the
market. Principal
Financial Group, for one, offers 90-day locks free, according
to Jodi Cornish, manager of nationwide lending. Half-year commitments
cost three-fourths of a point.
Mortgages designed specifically for the purchase
of new homes are another option. The Norwest
Mortgage division of Wells
Fargo & Co. offers a program that allows new construction
shoppers to get a one-year lock for free on certain adjustable rate
mortgages.
"It's a win-win all the way around," says Dixon
Sewell, a Norwest sales manager who works with builders in the Atlanta
area.
Rates don't always rise, however, and many borrowers
are comfortable floating their mortgage up to the last possible
moment. That can be as little as a couple of days before closing.
These consumers should be able to obtain loans for a little less
money, since 15-day and 5-day lock loans don't cost the bank or
mortgage broker as much to obtain from their funding sources.
Unfortunately, brokers often charge the 30-
or 45-day price anyway because consumers don't know the difference,
according to Jack Guttentag, a syndicated columnist who founded
the Mortgage
Professor Web site. Borrowers generally don't get stuck with
higher rates on their loans that way, but they do end up shelling
out a few hundred extra dollars in origination points or fees.
"When you elect to float, it's supposed to mean
you get the benefit of a rate decline if one occurs between the
time you elect the float and the time you finally lock just before
the loan closes," Guttentag says.
Some brokers don't even offer loans with very
short lock periods. That means customers who don't take the extra
time to shop for brokers with a full range of products may pay more
for their loans.
Locking
rather than floating
Consumers should remember that locking in rather than floating could
leave them with higher payments if rates decline. Ilich-Ernst got
pre-approved for her mortgage months ago and kept floating because
news about the market suggested rates would be fairly stable. But
she missed at least a one-quarter of a percentage point decline
and maybe more because she locked in a few days too soon.
At the same time, experts caution borrowers
against kicking themselves if they wind up in the same situation.
Rates can never get too low, they point out, but they can rise high
enough to make a mortgage unaffordable. Locking in guarantees that
you'll at least be able to buy a home, even if it costs a few extra
bucks. Refinancing is always an option, too, if rates drop far enough
later.
"I was watching them all the time and comparing
them with others," Ilich-Ernst says. But "we have to be objective.
"If it was the opposite case, that rates went
up, then I would like it. I would feel so good that, 'Oh my God,
at the last moment, I did it,' " she adds with a laugh. "My advice
would be just watch it."
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