Make sure that mortgage rate really locks

By Holden Lewis

When you lock in an interest rate on a mortgage, a spoken commitment is worth the paper it's printed on.

Get your rate lock in writing, in the form of a loan commitment from the lender.

Many mortgage borrowers come to grief because of misunderstandings about rate locks. Some borrowers fall prey to sneaky loan providers; others confuse a rate quote with a rate lock. Some are victimized by bad timing and it's no one's fault.

Rate-lock basics

A rate lock is a legal commitment between the borrower and the lender. The borrower promises to pay certain points and fees. The lender promises to lend at a specified interest rate. The borrower and lender (and mortgage broker, if there is one) agree to do their best to close the loan on or before a specified date. If the loan isn't closed by the deadline, the contract expires.

Locks typically last for 30, 45, 60 or more days. The longer you lock, the more likely you'll have to pay a fee for the privilege.

Think of a rate lock as insurance that you'll get your loan at the agreed-upon rate, even if rates rise. The lock protects the lender, too, because you're promising to borrow at the specified rate, even if rates drop.

This story is about making sure that you have a rate lock when you think you have one. Deciding when to lock is another matter, more art than science.

Every Thursday, Bankrate.com publishes the Mortgage Rate Trend Index, in which mortgage experts forecast whether they believe mortgage rates will rise, drop or stay the same over the next five to seven weeks. These experts aren't always right, so weigh their guesses with your hunches and your lender's or broker's advice.

Ups and downs

Mortgage rates are in an upward trend now, so rate locks are increasingly important. You take a risk if you apply for a loan and decide to float -- to not lock in a rate. But the risk isn't huge because rates fluctuate from day to day and even hour to hour.

Aware that rates fluctuate, unscrupulous brokers have been known to lie. They tell borrowers that they have locked in a rate with a wholesale lender when they haven't. If rates drop, these dishonest brokers can secretly lock at the lower rate and reap a covert profit after the loan closes.

If rates rise, the broker takes a reduced profit or even a loss. Or the broker can delay things until the rate lock expires.

Ready to find a mortgage? Check rates in your area.

Sophisticated brokers can play this game and leave the borrower none the wiser, says Bill Lavigne, a consultant who audits mortgage companies for compliance and licensing issues. "Now, many argue this isn't possible and it's not done because it's against the law, but I have seen it with my own eyes dozens of times," he says.

Lavigne adds the lying-about-the-lock trick doesn't happen as often as it used to because brokers are being regulated more closely.

Trust, but verify

Brokers are middlemen who have access to many sources of credit and can pick out the best available deals for their clients, whatever their credit histories. A loan officer at a bank has fewer sources of credit to choose from. About 70 percent of borrowers get their mortgages through brokers.

Most mortgage brokers are as honest as the day is long. To keep your broker that way, tell the broker upfront that you want to see a loan-commitment letter as soon as possible after you lock.

The letter should have your name and the lender's name, and it should specify the interest rate, any points and rate-lock fees, the date the rate was locked, and how many days it will be locked.

If the broker balks, walk, Lavigne advises.

Jim Bradley, president of American Residential Lending Corp. in Atlanta, is always ready to produce the loan-commitment letter. First, though, comes the rate-lock sheet, which is not the same as the loan-commitment letter.

"I have a form that I make my borrowers sign," he says. "The form says this: It says that they acknowledge that their options are one of two things -- they'll either float with the market, and they'll check that and initial it, or they'll lock in. They'll check that and initial it."

If the borrower chooses to lock a rate, "I tell the folks in order to get this to you in writing I will fax the lender and get a commitment."

Bradley asks for a check to pay third-party fees for items such as credit reports. He then gets to work finding a lender and locking in the rate and terms. When he does, if the borrower wants to see the commitment letter, it's there in black and white.

Change happens

Lots of brokers quote rates and terms over the phone. A rate quote over the phone is not a rate lock.

Sometimes brokers are whipsawed by rate changes beyond their control. Bradley makes house calls, and when he offers to lock in a rate and terms, "I tell them, 'Look, what I'm telling you now is subject to whatever the rate is when I get back to the office.' "

Occasionally, Bradley drives to his office only to discover that lenders have raised rates in the middle of the day. He calls the client back.

"I tell them, 'I'm sorry, the rate went up between the time I saw you and got to my office, and that's what I'll have to charge you," Bradley says.

Then the borrower has to decide yet again whether to float or to lock.

-- Posted: Jan. 24, 2002