Locking a mortgage loan holds the rate steady through the approval process and into closing.

Locking a buyer's rate now has more impact on the transaction's timeline than ever before. This is due to the new RESPA-TILA Integrated Disclosures we discussed last week. Click Newsletter Archives in case you missed it.

Today we'll go over the basics of locking a mortgage rate, then talk about how locking without a strategy can delay closings.

Doing it at the right time can mean buyer savings and a clean closing, locking at the wrong time can delay closing and cost money.

The need for locking is based on two factors - rate volatility and the time needed to take care of all the details leading up to closing and funding the transaction.

Locking means holding a certain rate available

to a specific borrower for a fixed period of time.

Mortgage rates in the US are based on the yields (interest paid to holders) of Mortgage Backed Securities, which are pools of mortgage loans bought and sold every day by large institutional investors like Wall Street firms, insurance companies, and retirement funds. This is known as the Secondary Mortgage Market.

MBS yields fluctuate day to day, sometimes hour to hour, creating rate volatility. As MBS yields go up or down, so do US mortgage interest rates.

Lenders adjust the market rates they offer the public each day based on what the MBS secondary market is doing and where they think rates and yields are headed.

Market rates are then adjusted to a specific borrower and transaction according to the lender's risk management. See Rate Variables in the Archives.

On any mortgage application, the available interest rate will float with market rates until it is locked by the Mortgage Originator.

If locks weren't used, the title company and closing agent would never be able to calculate the buyer's side of the HUD-1 settlement sheet (soon to be the Closing Disclosure) because the financing numbers would be constantly changing.

From the time a buyer makes application, receives initial approval, then ends up at the closing table, there's a lot to be done. Appraisals, inspections, title work, additional document requests, insurance coverage, and processing / underwriting all need to be completed before closing.

While all this is going on, the interest rate floats with the market unless and until the buyer and Mortgage Originator decide to lock it.

A proper loan lock must always be in writing and include:

- Interest rate

- Any points paid to "buy down" the rate

- Lock term in days with expiration date

- Any other details of the loan agreement

Lenders offer rate locks for various periods of time - normally

15, 30, 45, or 60 days from the locking date. A shorter lock period will usually carry a slightly better / lower rate than a longer one.

Very important - The lock period has to extend far enough to include the contract's closing date. If a closing extension is needed and agreed upon by seller and buyer, the loan lock may also have to be extended to cover the new closing date. Lock extensions cost the borrower money.

That's how the "too early" can come in - lock too early or for too short a time and it expires before closing.

A good Mortgage Originator will have the rate lock discussion with buyers early

in the application process. In fact when buyers sign the loan application, one of the documents is their acknowledgement of having either a locked or floating rate on the day they signed.

If a buyer and Mortgage Originator feel that rates could spike up in the near future, it may be good to lock when the loan gets initial approval, making sure to allow for enough time to close.

On the other hand, waiting to lock could mean more options and possible cost savings if rates appear in a down trend.

Choosing the right time to lock is a combination of strategy, market knowledge, and the buyer's tolerance for risk.

There's no way buyers can realistically expect to lock at the absolute lowest rate available within any floating time frame.
If they do, that's great...but it cannot be expected or guaranteed.

Now let's briefly deal with rate locks and the new Integrated Disclosures -

When your buyers and their Mortgage Originator have chosen to let the interest rate float until further along in the deal's timeline, buyers are disclosed with a currently available rate when they sign the initial Loan Estimate. Most Originators will just enter the rate pricing they received when doing the preliminary application, based on information the buyer provided up to that point.

If anything about the buyer or the transaction doesn't stay the same as when the Loan Estimate was prepared, that causes Changed Circumstances, which require a new Loan Estimate to be reissued showing the effect of those changes.

Normal fluctuation in market interest rates can cause Changed Circumstances when the rate is floating, then locked after the buyer signs the initial Loan Estimate.

With the new redisclosure rules, allowable cost variances, and mandatory waiting periods, this has the potential to require both closing date and loan lock extensions, or even sink the deal altogether.

That's how a loan can be locked "too late" - too close to closing and there may not be enough time for required redisclosures and waiting periods or to address all the settlement details before the contract's specified closing date.

This is where a trained, responsible, and accountable Mortgage Originator will hold your deals together and help meet your contract dates.

Let me handle the details, timing, and compliance matters

while you take care of your buyers and sellers.

As discussed last week, when buyers are properly PreApproved, then guided all the way to closing, Changed Circumstances are minimized and even eliminated.

Integrated Disclosures don't have to delay or stop your deals. I still suggest submitting contracts with 30-day Financing Contingencies and 38-day closings from effective dates for conventional financing, as long as your buyer can provide requested followup paperwork in a timely manner.

Call me when your buyers first start looking. When they know what to expect and have the information they need, there's no reason not to hit your contract dates and arrive on time at the closing table.

Let me reinforce the trust

your buyer has placed in you! sm