RateWatch #353 - Rate Locks
April 26, 2003 by Dick Lepre
With rates having moved down a bit, those of you who procrastinated refinancing might do well to take a shot at it now. We are not as busy as we were a month and a half ago and underwriting is speedy.
The Secret to Getting a Good Rate
In keeping with my general rule of: "Now that it is cooling down, it may be a good time to talk about it," I would like to discuss strategies for refinancing.
It is necessary to talk about a different topic and one that is not so easy to be objective about.
When you are refinancing you are usually seeking to get the best rate at a given cost. How does
one do this? I get calls from people who say: "I am shopping around for rates. What are your
rates today?" This is the wrong way to go about refinancing. The first thing to realize is that
the rate that you get is going to depend almost entirely on timing. The differences in the "retail
markups" among lenders is not nearly as large as the week-to-week or day-to-day differences in the market.
What one should do is talk with several lenders and get a comfortable feeling. The chemistry
between agent and borrower is a two way process. The borrower must convey his needs and wishes to the agent. The agent must present the borrower with a "basket" of choices and start to decide on what product is appropriate. Almost all of my customers now fill out on-line applications. This gives us the ability to determine, at once, what is going to work. The "basket" of choices contains realities, not dreams.
After this, a strategy must be worked out. For some of my customers I have what are essentially
an order to lock a rate when they can get a 6.0% 30 year fixed, no cost loan.
People often ask: "what exactly are rate locks?" Once, the customer and the agent agree on a rate
and price the agent faxes a rate lock form to a specific lender (in our case, our own wholesale
department). The rate is locked when it is accepted by the lender and signed and faxed back to us. The lock does not guarantee that the loan will be approved, it guarantees what the rate will
be if it is approved. The lock is for a specific program (such as a 30 year fixed rate conforming
loan) at a certain cost and rate. There is no charge for these locks. Lock periods can be as little
as 10 days or as long as 180 days. Locks of less than 30 days are usually for loans that are
already at the lender, approved and waiting for a rate to be locked. Long term locks (>90 days) require an "upfront" fee that is non-reimbursable if you walk away from the lock. The difference in cost at a given rate for 15-day lock and a 180 day lock would usually be at least 1.5 points. As a general strategy, we rarely recommend locks of more than 60 days. Once your rate is locked you might decide to switch from a 15-year loan to a 30- year loan, or from a 1-point loan to a no point loan. The rule, usually, is that we go back to the rate sheet from the day of the lock and get the price from there. Some lenders will not allow a rate switch of more that 0.25% in rate. Other lenders go on "worst case," meaning you must take the worst price from either the date of the original lock or the date of the re-lock. Thus, it is necessary that if a lock is done without knowing what program you want, the agent at least has an idea as to the range of choices so that the lender who executed the lock will satisfy all these needs.
But what about when rates go down?
In harsh reality a rate lock is a one-way deal. It protects only the borrower. When rates drop,
borrowers want a better deal. This is where the daily updates of WWW sites have, to some extent, created havoc. The agent is in the middle of this. Borrowers want the best rates and lenders do not want agents to allow borrowers to walk away from their locks.
What RPM now has is a one-time float down policy. Before I submit your loan to the underwriters I can improve your rate or cost once.
In the case of a purchase where there is a contractual obligation between the buyer and seller for the transaction to take place on a certain date, the loan has a lot less "mobility" and attempting to get a borrower a better deal on an already-approved purchase loan is dangerous.