Rate locks: tin shields or the real deal?

The recent rise in interest rates has popularized the notion of rate locks during mortgage processing.

A rate lock is a lender’s commitment to fund a mortgage at a quoted interest rate, origination fee and fixed number of points, regardless of whether interest rates rise or fall prior to funding the mortgage.

When lenders issue a rate lock commitment, they theoretically reserve funds at the time of the commitment. Thus, the lender’s cost of funds for the mortgage is also locked, along with the buyer’s rate.

Rate locks are most practical for first-time home buyers, to whom a one-quarter percentage change in the rate may be crucial.

Home buyers may ask to lock in their rate at any time during the mortgage approval process. Rate lock commitments vary between lenders. The standard rate lock period for most lenders is 30-60 days.

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At first glance, rate locks seem like a brilliant idea. A personal favor from lenders to home buyers, if you will. You can almost picture the banker as a benevolent old man, looking thoughtfully at a home buyer’s loan documents, saying aloud, “Well, now, it wouldn’t be fair to make them pay more if rates go up.” The hypothetical lender almost looks like Mr. Monopoly; rosy cheeked, generously mustached, in a crisp black suit.

What you’ve forgotten is that, although Mr. Monopoly looks jovial, the game he plays is cold nickel and diming, where one wins and many lose for failure to understand the rules.

Mortgage lending is not a charity. It’s business.

A rate lock as issued by lenders in the loan process is NOT a commitment to lend your buyer money. A loan commitment must be in writing. [Calif. Civil Code §2922]

Further, to be enforceable, the lender must receive consideration for the loan commitment. Even then, no lender guarantees a mortgage until it is funded and closed.

A rate lock is not a guarantee your buyer will receive the rate stated on the rate lock statement. It is not certain. Why? It is always contingent upon all other lender requirements being met at time of funding.

A long list of contingencies to the rate lock provides the lender with an equal number of opportunities to escape from the rate lock agreement even if it were binding. Your buyer’s interests are best served by expediting the loan process as much as possible, lock or no lock.

To close the mortgage as quickly as possible, direct your buyer to collect the following information before asking for a lock on the rate and points quoted:

• bank account numbers;
• latest bank statement;
• latest pay stubs;
• W-2 forms;
• tax returns for the past two years;
• loan and credit card account numbers;
• names and addresses of creditors;
• name and contact information for their new homeowners insurance company; and
• evidence of mortgage or rent payments.

However, even if your buyer gets the agreed-to rate at closing, rate locks are a gamble — the buyer’s got to ante up just to get a chance at keeping a lower rate in a rising market.

By their nature, a rate lock is never a guarantee your buyer will receive the most advantageous mortgage terms available at the time of funding.

If you really want to better your buyer’s chance of closing with the best rate and terms possible, counsel them to submit applications for a mortgage to at least two institutional lenders. A second application with another institution – bank or credit union – gives the buyer additional leverage in mortgage negotiations needed at closing.

Forced into competition at the critical moment, lenders develop the necessary impetus to keep mortgage costs as low as possible. Without this backup application, a lender holds your buyer captive to do as they please at closing.

Re: “Mortgage lock-in agreements are back in vogue with rise in interest rates” from The Washington Post.