SANTA CRUZ (July 11, 2010) - Since the Fed announced last December that it was going to aggressively participate in purchasing mortgage-backed securities, mortgage rates immediately moved down to 4.50 percent (rates were around 6.0 percent just before Thanksgiving) but have been moving up and down erratically since then. Over the past seven months we have seen lows down to 4.50 percent and highs up to 5.75 percent. Since then prudent and patient homeowners and homebuyers have been able to take advantage of historically low rates during the dips.

An important part of the mortgage origination process is locking in an interest rate. A home buyer who is in contract to buy a home or a homeowner who is refinancing may typically lock in an interest rate up to 60 days before his or her transaction is due to close. This means that today’s interest rate may be preserved even though interest rates may increase during the escrow period.

Homebuyers can lock in a rate once they are in contract to purchase a home and know the sales price, the loan amount and the close of escrow date. Refinancing homeowners can lock in a rate once they have filled out a loan application and have identified their new loan amount.

To lock in a rate, there must be a property address, a loan amount, an interest rate and a fixed period of time that that rate will be honored. The standard lock-in period is 25 - 30 days. If we are asked to lock in a rate for longer, there will usually be an extra charge of an additional one eighth to one quarter of a point in loan fee. For a $400,000 mortgage, that translates to an increase of $500 - $1000 in closing costs. If rates were 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 mortgage interest paid; however, if rates are decreasing, there really is no need to lock your rate more than 30 days before escrow will close.

The process of locking in an interest rate typically involves a verbal agreement between the home buyer and mortgage originator but a written agreement with the lender. 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. We are often asked if a borrower can re-lock their loan if rates drop. Typically, that is not an option; however, once in a while we have been able to negotiate a lower rate for a borrower when rates dropped significantly.

In order to take advantage of the locked-in rate, the loan must be fully approved and the refinance or purchase transaction must fund by the expiration date of the lock period. If, for some reason, the transaction is not ready to close by the expiration date, the lock period may typically be extended for an additional fee.

During the loan process borrowers are well advised to stay in close communication with their mortgage professional, who in turn, will stay up to the minute on mortgage rate movements. Getting a good rate will be, in part, dependent upon the skills and experience level of your mortgage professional.

When comparing rates with other borrowers, keep in mind that everyone does not get the same rate because rates are based on a myriad of factors such as loan origination fee, loan-to-value ratio, credit score, debt-to-income ratio, occupancy, loan amount, lock period, etc. Also, when calling around or cruising the internet, remember that when it comes to getting a quote on rates, all of the above variables must be considered before an accurate rate can be quoted.

This column is written every Saturday 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.