SANTA CRUZ (September 21, 2008) - We have all witnessed the incredible volatility of the stock market this past week. We have also experienced a comparable volatility in mortgage rates this week. The popular 30 year fixed loans dipped to lows that approached the lows that we enjoyed in 2003. Like the stock market, mortgage rates are also experiencing wide swings. Rates dipped down to 5.375% and promptly shot up to above 6%. Those are big swings.

Homeowners who want to refinance and homebuyers who want to buy want to know how to capture a great rate. Lenders have a process for securing the interest rate and it is called ‘locking’. At the request of the borrower, lenders will lock in an interest rate up to 60 days before their transaction is due to close. A lock today means that today’s interest rate may be preserved even though interest rates continue to increase during the escrow period.

A standard lock-in period is 20 - 30 days for fixed rate and adjustable rate mortgages. If a lender is asked to lock in a rate for longer, there typically is an extra charge of an additional one eighth to one quarter of a point in loan fee. For a $500,000 mortgage, that amounts to an increase of $625 - $1250 in closing costs. If rates are increasing, this additional expense can be well worth it and could save the borrower tens of thousands of dollars over the life of the loan in reduced interest rate.

For example, a home buyer who locks in a 30 year fixed rate today at an interest rate of 5.5 percent can count on receiving that rate when escrow closes despite the fact that mortgage rates may have risen to 5.75 percent or higher by then. The rate may be locked-in at any time prior to closing escrow. When mortgage rates are falling it behooves the buyer to wait until the last possible moment, at the end of the escrow period, to lock in a rate.

The process of locking in an interest rate typically involves a verbal agreement between the home buyer and mortgage originator. When an interest rate is locked-in, the lender will honor the rate even if rates increase. Conversely, the lender will expect the borrower to honor that lock commitment even if interest rates drop. It has been my experience that lenders will re-negotiate a rate lock if interest rates fall significantly during the locked-in period. A significant drop would be .375 percent or more.

Broken locks can cost lenders big bucks. Consequently, lenders monitor ‘pull-through’ rates. That is, they keep track of loans that are locked and then broken. Locks that are broken because the borrower does not end up purchasing the property is one thing but if they are broken and the borrower goes to another lender, the mortgage originator could stand to pay a hefty penalty. Lenders are getting smarter...here’s what they do. They check public records through a system called MERS (Mortgage Electronic Registering System) and if a loan on a property is locked by xyz lender but the mortgage broker changed lenders and locked it somewhere else, xyz lender will come back to the broker and charge a pair-off fee which could be thousands of dollars and would be the responsibility of the mortgage broker.

This column is written every Sunday by Peter Boutell, Certified Mortgage Planner and a principal at Santa Cruz Home Finance. You may reach him at (831) 425-1250 of email him at Peter@SantaCruzHomeFinance.com.