THE BASIS POINT

Why Locking A Mortgage Rate Is Like Buying A Stock

A common question among mortgage shoppers is: what if rates get better after I lock a rate for my loan? The answer is that locking a rate is much like buying a stock.

When you choose to buy a stock at a specified price, you’re executing a Limit Order. This means you set the price at which the trade will be executed rather than being subject to the market price at a trade interval.

So if you execute a limit order to buy a stock at $55.00, you own it at $55.00. If the market price declines to $52.50 after you own that stock, you can’t go back to the securities firm and re-purchase those shares at the lower price. You could elect to use some kind of hedging strategy to offset the loss but even then, you’d be incurring more cost to buy more securities to create a hedge.

The same “limit order” concept generally applies to a rate lock. When you request to lock a specific rate, that’s the trade. So if you were to lock a rate at 5.5% and the rate market declines to 5.25% after you lock, you typically can’t go back to the mortgage firm and re-lock at the precise new market low.

Depending on the size of the market movement and the mortgage company’s policy, you’d either be granted a portion of the market improvement for free, or you’d incur some kind of “lock renegotiation fee.”

Each lender has a different policy on this, and it’s important to work with your mortgage advisor to understand the rate lock policy.

It’s perhaps more important to understand that, unless your loan disclosures state that the quoted rate is locked, it is not locked.

The new 2010 Good Faith Estimate form is clear about this on page one. It will tell you exactly how long that rate quote is good for, whether it’s five minutes, sixty days or anything in between.

If you’re buying a home, remember that a rate lock runs with borrower AND property. So you should be in contract on that property before you can lock a rate. This usually means rate quotes up to the point a seller accepts your purchase offer will be subject to change—so you need new quotes when you’re in contract, then you can look to lock a rate.

If you’re refinancing, you have more freedom to wait and watch the rate market for the right timing if you so choose. But rates look likely to rise off of record lows in 2010 as the Fed nears the end of their rate stimulus program on March 31, 2010.