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HOW TO LOCK IN THE MORTGAGE RATE

In the previous sections, we discussed how to find the best loan officer and mortgage rate. But unless that mortgage rate is guaranteed or “locked in,” it may not be good.

When you lock in an interest rate, you're guaranteeing that the rate will be reserved for you when you go to the closing table. If you're not locked in, then you'll be subject to market conditions and you'll take whatever's available when the lender gets ready to print out your closing papers.

If you've done all the hard work of finding the best deal, don't mess up by not locking in that rate.

Lenders take locks very seriously — just as seriously as you do. If you lock in a rate with a lender, the lender reserves that rate for you. If you go to another lender, it will have to replace your lock with someone else's loan, or else it could pay a premium for taking out money and not using it.

Lenders don't lock you automatically. If you call and get a rate quote the lender isn't going to reserve that money and that rate for you without your express permission. You have to tell your loan officer you want to lock in your rate. What are the procedures for locking in?

Mortgage companies can have different internal guidelines and paperwork for you to fill out. But at minimum, the lender will ask that you complete a loan application with it before it locks. A lender won't lock you over the phone without a loan application; this keeps people from calling up lenders on the phone and verbally locking in a mortgage rate while still shopping around for other lenders.

Some lenders will ask you to pay for your appraisal ahead of time when you apply with them. This means you must have a condo, co-op, or townhouse already picked out, and that you've got a sales contract in your hand.

What if you lock in and then the rates go down? Then you get whatever you locked in at. Rate locks protect both the borrower and the lender. When you lock in at 6 percent and rates go up, you're protected. If you lock in at 6 percent and rates go down, then you still get the rate you locked in.

Get your lock agreement in writing. Don't make a verbal agreement; there will be no record of your lock request. Until you get written confirmation that your rate is indeed locked in for the amount of time you need, don't feel as though you've got your rate guaranteed.

There are no specific lending laws that determine how a rate-lock agreement should read or what it should look like. But all national lenders, retail banks, and larger mortgage bankers have a form. If you're working with a mortgage broker, it's likely they'll have their own form as well. If they don't, the wholesale lender will have one.

Why not trust a verbal agreement? Besides the obvious reason previously mentioned, if s also possible that the loan officer didn't get around to locking you in. She might have forgotten, but more likely she could be trying to make a little extra money. Here's how it works: Say you call your loan officer and tell her, “Okay, lock me in at 7 percent,” and the loan officer says, “There. You're locked.” Sounds pretty straightforward, right? But sometimes a loan officer will gamble that rates will drop slightly. If they do, the loan officer can then lock you in at the rate you requested and make, say, another 1/4 point on the loan.

Most major banks and mortgage bankers have strict guidelines against floating a lock so the loan officer can exploit market gains. For starters, it's unethical because it's not what the buyer and the loan officer agreed to. Also, it's possible for the loan officer to make a “bad bef' on the market and lose your money. So, to avoid having to start over again (not to mention the possibility of suing the lender), when it comes to locking in a rate, get it in writing.

Mortgage brokers have become more regulated and wholesale lenders are requiring that if there are any market gains the mortgage broker must have you sign a piece of paper acknowledging that she is making more on the loan than you had previously thought. We'll discuss such disclosure in chapter 6.

Mortgage brokers, because they're set up with multiple wholesale lenders, may also lock you in at one bank and then, if rates go down, simply lock you in at another lender at the new, lower rate. This can happen on occasion, but wholesale lenders also monitor what is called a “pull-through” rate, which shows the number of loans locked with the wholesale lender compared to the number of those locked loans that were actually delivered. When a wholesale lender sees, for example, that a broker locks in loans, then delivers only 25 percent of them, pretty soon that broker will no longer be allowed to work with the wholesale lender.

If, while shopping for a lender, a loan officer tells you that because they're a mortgage broker, if rates go down they'll simply send you to another lender, be aware of one thing: If the broker regularly engages in this practice, soon they won't have anyone to send loans to because their pull-through rate will be so low.

Some loans offer a free float-down feature that allows you to renegotiate your interest rate if rates fall precipitously during your contract period. Few lenders offer an official float down, but typically the interest rate must have been reduced by more than 1/8 percent and the broker pays a 1/2 to 3/8 percent float- down fee.

You'll need to ask up front if the loan has a float-down feature. Float downs aren't free, but when rates drop enough, they may be a good option.

The final way to get the lower rate if rates have moved down after you locked in is simply to ask the lender to honor the new, lower rates. Loan officers can be very well aware that if the new lower rates aren't honored, you could walk away from the deal and go elsewhere, given enough time to transfer your loan and close on time.

That being said, if you demand that your lender, “Reduce your interest rate, or else!” when you're five days away from your closing, the lender won't honor your request. That's because he knows that you run the risk of not closing on time and losing your earnest money deposit, and perhaps the property.

 
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