by Nancy Osborne, COO of ERATE®
Many a prospective borrower can go wrong by confusing a rate quote with a rate lock.
It is vitally important to note that they are not one and the same. A rate lock is in fact a pledge or commitment from a lender that they will guarantee a specific interest rate, points and fees for a defined period of time.
This time frame typically ranges from 15, 45 to 60 days depending on the length of time it will take to process the loan or the duration of the contract on a purchase loan transaction. Note it is important to get the rate lock commitment from the lender in writing.
It is best to have an authorized loan officer sign the commitment on the lender's letterhead in addition to specifically outlining the terms of the rate lock.
It is important to realize that a rate lock should ideally be a two way commitment between both lender and borrower. That is to say that there should be mutuality of contract and that the rate lock should work both ways. If interest rates were to fall during the term of the lock, the borrower may not, and likely should not, be able to take advantage of lower rates unless the rate lock commitment specifically permits the borrower to do so and in some cases this may involve an additional fee on the part of the borrower. Rate lock policies, including the cost of relocking a rate, will vary widely from one lender to another. Some lenders may automatically extend the lock only for a given length of time. Other lenders will automatically extend the lock until the loan is able to close perhaps with one free rate extension while others will charge an additional fee to extend or break the terms of the original rate lock.
A rate lock is also not the same thing as a loan commitment. Note that your rate could be legitimately locked in by the lender in writing at the time of application and may then be denied by the lender's underwriters (or risk evaluators).
In order for a borrower to successfully close their loan at the promised rate and terms the loan must successfully steer through the lenders underwriting and funding departments and you as the borrower must do everything in your power to comply with their requests in a timely manner or risk jeopardizing your own rate lock.
The lender who guarantees your rate should also be the same lender who funds the loan. This means that a mortgage broker acting as an intermediary between yourself and the funding lender is not necessarily in a position to offer this guarantee. There are many legitimate and honest mortgage brokers in many states who offer the most competitive sources of mortgage loan financing and to exclude this group from your pool of potential lenders for the trade-off of the promise of a “guaranteed best rate” may not best serve your rate shopping goals in the end. This is something to consider as well.
While this offer sounds like a can't miss proposition, upon closer examination it's not always all it's cracked up to be. Many lenders are offering prospective mortgage applicants the promise or guarantee of the lowest market rate on the day in which they lock in their rate. But if you review the terms and conditions required by the lender you will see that they are indeed not offering you any great favors as their terms and conditions are next to impossible for a borrower to meet. First and foremost the rate which lenders are comparing is the illusive, difficult to compute and comprehend, APR or Annual Percentage Rate. The problem with using APR as the barometer for the rate comparison is that each lender does not calculate APR the same way. One glaring example of this is the use of pro-rated (or per diem) interest in the calculation. Lenders are allowed to use anywhere from 1 to 30 days of pro-rated interest when calculating APR and depending upon the size of the loan involved, as well as the interest rate, the pro-rated interest can amount to a sizeable chunk of the closing costs. For example on a loan amount of $350,000 with a rate of 6.00% 15 days of pro-rated interest would total $863 while 30 days would total $1,726. This difference could alter an APR calculation decidedly, by $863 to be precise.
Next, the hurdles a borrower is required to clear in order to provide the Guaranteed Lowest Rate (GLR) lender with proof or evidence of a lower rate is substantial. A borrower must typically submit a Good Faith Estimate (GFE) generated by the competing lender, complete with APR and itemized fees, dated exactly the same day as the GLR lender's, while many of the lenders have daily deadlines for delivering this documentation, for instance noon the same day. Try extracting all the required paperwork from a lender you received a rate quote from before noon the same day. The GLR lender is then permitted the time necessary to review and authenticate the competing lender's GFE under their own terms until arbitrarily satisfied that the competing lender did in fact offer a rate and terms which beat their own. During this time a borrower might lose the opportunity to proceed with the loan that actually does secure for them the lowest rate and terms. This time constraint may prove to be a horrible trade-off for a borrower as time is typically in short supply where rate locks and loan closings are concerned. Many GLR lenders also require that your loan be approved or pre-approved prior to the rate comparison in order to ensure that your loan is indeed one that they can legitimately close under your desired rate and terms. Therefore your loan may need to be far enough along in the process, having completed underwriting and possibly having satisfied all the loan conditions required to be cleared prior to ordering loan documents, before your loan could be evaluated under the GLR guidelines.
It is important to note that the Annual Percentage Rate (APR) calculation on an Adjustable Rate Mortgage or (ARM) becomes even more difficult to compare on an apple-to-apples basis. This is because many factors in an adjustable rate mortgage (primarily the future of the index to which the ARM is tied) contain unknown variables and these unknown variables must then be forecasted, projected or assumed by your lender in order to calculate the APR. This can truly cloud the basis of any legitimate comparison. Therefore many GLR lenders do not include ARM's under their guaranteed lowest mortgage rates programs.
Lastly, many of the remedies offered to a borrower once a lower rate has indeed been identified, do not truly cure or fully resolve their situation. Many lenders offer only to improve their own fees by a nominal amount (say $50 to $100) or pay the applicant a flat amount out right, something equivalent to an appraisal fee for their trouble. Given the time and opportunity cost involved, it may not be worth it.Refinance at Today's Low Rates!
Many experts believe that a rate lock commitment does have all the elements required to constitute a legitimate contract; that is offer, acceptance and consideration. There is also a case that passed through the Maryland Court of Appeals which is helpful in defining this as it may relate to the risk of opportunity cost assumed by a borrower who believes he or she has locked in or secured a rate with one lender and therefore ceases from searching for rates with a competing or alternate lender. The one element which may be missing in the equation is mutuality of contract, that is the lender does not typically have legal remedy, or take legal action, against a borrower who refuses to close their loan in the event rates suddenly go down and a borrower insists on receiving the current lower market rate. For a contract to exist it should indeed be actionable both ways for each party to the contract.
If you find yourself in the frustrating position of having lost a rate which you believe to have been legitimately locked in by your lender, and to which you have the aforementioned confirmation in writing, and due to no fault or delay by yourself, consider taking the following action. Contact the manager at the office under which your rate was locked and send a copy to your loan officer, agent or representative advising them of your intention to file a complaint with the Attorney General's office, the Federal Trade Commission (FTC) and any pertinent state regulating agencies. Also let them know of your intention to retain legal counsel if the matter cannot be resolved internally in a timely manner.
Nancy Osborne has had experience in the mortgage business for over 20 years and is a founder of both ERATE, where she is currently the COO and Progressive Capital Funding, where she served as President. She has held real estate licenses in several states and has received both the national Certified Mortgage Consultant and Certified Residential Mortgage Specialist designations. Ms. Osborne is also a primary contributing writer and content developer for ERATE.
"I am addicted to Bloomberg TV" says Nancy.