CHAPTER 13

Finding the Best Interest Rate

Ah, the Holy Grail. After getting all your finances together, finding a home, finding a loan program, finding a lender, and finding a loan officer, it all boils down to this, doesn’t it? Knowing how rates are set, how they can move, and when they move can help you nail down a rock-bottom rate.

13.1 WHO SETS MORTGAGE RATES?

Lenders set interest rates every business morning as markets open. There are various indexes, but for fixed-rate mortgages they’re set to a mortgage bond and priced accordingly. A 30-year fixed-rate price will be tied to the current 30-year Fannie Mae coupon being traded that day. If the yield on that mortgage bond (coupon) goes down, lenders will drop their interest rates. If that yield goes up, the rate goes up.

For adjustable-rate mortgages they do the very same thing. If your ARM is based on the one-year treasury, then your rate will move up or down depending upon the current price of a one-year treasury. So it goes with any other loans that track a particular index. If that index goes up or down, your rate will move along with it.

13.2 HOW DOES MY LOAN OFFICER QUOTE RATES?

Your loan officer will have more direct influence on your mortgage rate than the lender will. At major retail banks and national mortgage bankers, loan officers are required to quote a specific rate for a specific product without variance. If a lender says, “For loans between $300,000 and $417,000 the interest rate will be 4 percent with one point,” that’s what you’ll be quoted.

National lenders have a database that the loan officer uses to review all your parameters, such as credit scores, loan amounts, amount of down payment, debt ratios, and so on. The loan officer will ask you the appropriate questions to enter those variables into the mortgage rate pricing system and your rate will be quoted based on your answers.

If you’re not working with one of these national lenders or retail banks, it’s your loan officer that determines your interest rate. Each day as lenders set their rates, they’re really only setting the “wholesale” price of each rate and program, and it’s up to the loan officer to quote the rate to you.

13.3 BUT DOESN’T THE FED SET INTEREST RATES?

Sure, the Federal Reserve chair along with the Federal Open Market Committee, or FOMC, set interest rates, but they don’t set mortgage rates. What the Fed sets is either the Federal Funds rate or the discount rate or both. They provide cheaper or more expensive money to the markets by making money more expensive or less expensive. These two rates that the Fed sets are short-term rates. Very short term, as in overnight.

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The Federal Funds rate is the rate banks charge one another to borrow money overnight. Why do banks do this? They have certain reserve requirements that keep them liquid. If a bank makes a loan, they have to adjust their reserves at the same time. If they don’t have enough money in reserve at the end of a business day, they have to go borrow it—fast. So they borrow from one another at deeply discounted rates. If the Fed wants to stimulate a sluggish economy, they make money cheaper by reducing these rates. The theory is that since money is so cheap, lenders and investors are more likely to make more loans to businesses that want to buy new factory equipment or invest in new products.

The Fed plays a role in interest rates, just not one tied to your mortgage. Instead, what happens is that investors anticipate future Fed moves and hope to profit from them. And when it comes to bonds, it sometimes depends on whether these investors think the economy will be white-hot with consumer demand, driving up prices (which raises interest rates), or stone-cold, with all the money leaving the stock market and being placed in bonds, thereby driving up the bond prices and reducing interest rates.

When the Fed reduces rates, they hope to stimulate the economy. When they increase rates, they want to slow the economy down. The Fed looks at the overall economy and pays attention to various reports that may help guide them in keeping the economy from overheating or going into a recession. If a report comes out that suggests the economy is gaining steam, then the likelihood of higher interest rates looms larger. Not just one report by itself, but perhaps several reports over an extended period. Exactly what the Fed watches is a mystery, but there are plenty of pundits that watch the same data and try to guess what the Fed’s next move might be.

13.4 ARE MORTGAGE RATES TIED TO THE 30-YEAR TREASURY AND THE 10-YEAR TREASURY?

Sorry, they’re not. You can’t track mortgage rates against the 10-year or 30-year treasury. While they’re both fixed investments, they’re not tied to mortgage rates. Trying to tie mortgage rates to either of these rates is like trying to track Wal-Mart stock to the Dow Jones average. You might see some coincidental moves, but there is no direct correlation.

But let’s look a moment at what can influence the price of a bond in general. When investors have money to invest, they can do it in stocks or equities that may provide a greater return on their investment than bonds. Or if investors want to avoid more risk but get a steady return, they will choose a bond. In the case of mortgages, they might choose a mortgage bond. It’s less risky than a stock, and the return is guaranteed. That’s the reason why, during soft economic times, people invest less in a stock market they perceive as risky and park their money in bonds instead. If more people have the same feeling and buy the same bond, they then push up the price of that bond. Higher demand equals higher price, right? When the price of a bond goes up, the rate goes down.

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Here’s how it works. Let’s say a note seller has some $1,000 notes that pay 5 percent in interest over a preset term. At the same time, the Dow Jones Industrial Average has been taking a beating as of late and some investors are getting a little weary of losing money by the bucket. So instead of investing in stocks, they look at these $1,000 notes. Sure, they only pay 5 percent, but that’s a lot better than losing 20 percent, right? These investors begin buying the bonds at $1,000 a clip.

Because of the increase in demand, the seller soon begins raising the price of that bond, and those same $1,000 bonds now cost $1,100 for the same 5 percent return. Sure, the 5 percent is still nice, but it costs a little more now, doesn’t it? Because of that rise in price, the effective interest rate then drops from 5 percent to 4.55 percent. That’s how mortgage bonds work as well. When the price increases, the rates fall.

13.5 WHO INVESTS IN BONDS?

Most every institutional investor does. It’s a guaranteed rate of return for them. But there’s a bugaboo when investing in bonds: inflation. Inflation will eat into the value of the bond by reducing the value of the return. A bond will guarantee a certain yield, say, $5,000. If inflation creeps into the picture and prices rise across the board by, say, 10 percent, then that same $5,000 isn’t worth what it was when it was first issued. Inflation ate away at the final value. That’s one of the reasons that when the stock markets are doing well, the bond market is not.

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As an economy picks up steam, a couple of dynamics come into play. First, people pull money out of bonds (reducing the price and raising the interest rate of the bonds) and put it into stocks. Second, a stimulated economy can increase consumer demand, which will increase consumer prices. This situation can cause inflation, which again reduces the value of a mortgage bond, raising rates. Historically, when bonds are doing well, the stock market isn’t. At least that’s the theory. And in practice?

Overall, yes, when the stock markets are doing poorly, then people invest more in safer fixed instruments like bonds, resulting in lower interest rates. There are times, however, when the bond and stock markets are doing well at the same time. How does that work? Toward the end of an economic slowdown and at the beginning of an economic upturn, lower rates encourage businesses to borrow more and then use that money to hire more workers and expand factories. As people begin to gain more confidence in the stock market, they start to invest in lower-priced stocks, anticipating an upturn. Sound confusing? It can be, but in general if the economy isn’t doing very well for any extended time, then you will see interest rates gradually move downward.

13.6 WHERE ARE RATES HEADED?

I have probably been asked that question more than a thousand times. Literally. It’s the question everyone wants answered. The fact is that no one knows where rates are headed. No one. Yeah, there may be long-term trends over the course of a month or a year, but when you’re closing at the end of the month that’s not much help, is it? Trying to determine what rates are going to do over the next few weeks or months is a nightmarish prospect. I don’t know, your neighbor doesn’t know, and the financial gurus on television don’t know, either. They might guess, but they don’t know.

When I’m asked where rates are headed, I always respond, “I can’t tell you where they’re going, but I can tell you where they’ve been and where they are now.” If that sounds a little smart-alecky, it’s not supposed to.

Anyone who is advising you on interest rates and tells you where they think rates are going is being irresponsible. They’re not the ones closing on a home loan, after all. If they predict wrongly, so what? No harm. But if someone tries to tell you what’s going to happen in the interest rate environment, ask them if they’ll guarantee their predictions with a little moolah. I promise you that you’ll get no takers.

13.7 WHAT TYPES OF ECONOMIC REPORTS SHOULD I PAY ATTENTION TO?

Some reports may impact interest rates more than others. Some reports might cause a reaction in the markets one day and then be completely meaningless the following day. It’s only important that you understand how daily economic data can make an interest rate move in the course of a few minutes after a report’s release. Any report that suggests good economic news will be portrayed as bad for the bond market, causing interest rates to rise. Reports that foretell a future recession may cause rates to fall. Here are some reports that might cause rates to swing one way or the other after their monthly release. In essence, the better the economic report, the greater the likelihood of higher rates.

Report	What It Means
Construction Spending	More spending means more jobs, recovering economy, and the possibility for higher rates.
Consumer Confidence	A confident consumer buys more and acquires more debt, which creates higher prices and higher rates.
CPI	Consumer Price Index: an inflation indicator. Higher inflation means higher rates.
Durable Goods Orders	More goods sold means more jobs, strong economy, and higher rates.
Existing Home Sales	More homes sold means more jobs and a better economy, which can lead to higher rates.
Factory Orders	More orders, higher rates.
GDP	Gross Domestic Product: More goods produced means a strong economy, which leads to higher rates.
ISM	Institute for Supply Management (formerly called the Purchasing Managers Index): More goods sold means good economy and higher rates.
LEI	Leading Economic Indicators: used to forecast future economic growth. High indicators mean higher rates.
NFPN	Non-farm Payroll Number: This is the net gain or loss of full-time private and government jobs from the previous month. Job gains indicate a strong economy, rates will rise.
PPI	Producer Price Index: wholesale inflation numbers. Higher prices for goods mean higher rates.
Retail Sales	Strong retail sales figures mean a strong economy and higher rates.
Unemployment Numbers	Low unemployment and lots of new jobs being created mean higher rates.

Note that all of these reports can cause higher rates. But these same reports can also have the opposite effect. If unemployment goes up, and more and more people lose their jobs, that’s a negative for the economy. A negative for the economy can mean lower interest rates. Just as reports can point to a booming economy, they can also point to a weakening one. And here’s an additional twist: The report can also be reported as neutral and having no effect at all because the new economic data reflected a “steady as she goes” economy.

13.8 DO I FOLLOW ALL OF THE ECONOMIC REPORTS?

Of course not, but you need to understand how economic reports can affect mortgage rates. And you must understand how mortgage rates are priced before you can begin to negotiate. Otherwise, you won’t know why interest rates went up, down, or sideways for no apparent reason. There are plenty of things that can impact interest rates, such as a speech by a key political figure, a natural disaster, the threat of war, oil shortages, the value of the dollar, the trade deficit, or a foreign country investing heavily in U.S. bonds. But as you and I are at work all day, it’s impossible to keep track of all of them.

13.9 WHEN IS THE BEST TIME TO GET A RATE QUOTE?

The best time to get rate quotes is in the morning after any governmental reports on the economy are released. Most reports are released by 9:00 a.m. (EST), though some come before and some come a little after. If you check interest rates late in the day the markets may be closed, and if you check too early in the morning lenders may not have had time to price their rates for that day.

There are some very smart people in the mortgage business whose sole job is to price mortgage rates. They scan all the economic data, watch the various mortgage bond prices, and price their interest rates for their loan officers to use. If mortgage bonds are up, then rates for that day will be down. Sometimes, during the course of a business day, mortgage bonds will make a sudden move. If the move is dramatic enough, the lender will reprice mortgage rates during the business day. If the move is only slight, the lender may do nothing at all, waiting until the following day to see if a price change is necessary.

Interest rate prices are set by basis points, and a basis point is 1/100th of 1 percent. If the cost of a mortgage bond rises by 20 or 30 basis points, you can expect the cost of that bond to adjust accordingly. A move of 50 basis points would cause a 30-year fixed mortgage rate to adjust by 0.125 percent. A move of 100 basis points would cause a rate adjustment of 0.25 percent, and so on.

13.10 CAN I TRUST THE INTEREST RATES IN THE NEWSPAPER OR ONLINE?

Interest rates in newspapers are days old. Many newspapers around the country publish their “interest rate surveys” in the Sunday paper, usually in the real estate or business section. Many papers cut off their advertisements for businesses on Thursday mornings, so the interest rates you see aren’t from that Sunday; they’re from the previous Thursday morning. Not only that, but by the time you contact a lender the following Monday morning, new pricing has already come out for that day as well.

Don’t expect to get the same rate you see in the newspaper when you make your telephone call. You might be able to get that rate if rates haven’t changed for several days, but just know that published rates are old news. For that matter, any published rate advertisements have to be understood in the same context, whether they are in newspapers, on the radio, on television, in business magazines, or even on the Internet.

Over the years, the Internet has been the place where lenders advertise their rates where a service will publish a list of mortgage companies and their associated interest rates. These are updated typically every day by the individual lender. But still, by the time you research the rate and place a phone call, the rate might very well have moved.

13.11 WHY ARE SOME LENDERS SO MUCH LOWER THAN EVERYONE ELSE?

They can’t be. Okay, someone might be a little lower, but lenders and brokers all get their mortgage money from the same place, so any differences will be marginal. When I was a mortgage broker, I would get interest rate sheets faxed to us each and every day from our wholesale lenders. Probably 40 to 50 different lenders would solicit our business that way. When I first started in the business, I would painstakingly pore over dozens and dozens of rate sheets, hoping to find the lender that would have the absolute lowest rate on the planet so I could get all the business I wanted. What I didn’t realize was that I wasn’t the only mortgage broker in town doing the exact same thing. In fact, I lived in San Diego, where there were thousands of loan officers getting the very same rate sheets.

I soon discovered that there was no reason for me to scour 40 rate sheets every day for the best interest rate. There was no such thing. Almost to a lender, each rate sheet was within 25 to 50 basis points of one another. That works out to rates being about 1/8 percent or so apart (since 50 basis points buy 1/8 percent). That means 4 percent and 4.125 percent. Nothing like the 5 percent or 6 percent I was looking for. It just didn’t work out that way. On occasion a lender might run a promotion and offer better pricing or lower fees to gain market share, but even then such promotions were relatively tame and short-lived. Instead, I discovered that I used maybe three or four wholesale lenders on a daily basis, not 40 or 50. What does that mean? It means that if someone’s quoting a rate that is hands-down 1/2 percent better than anyone else’s, then there’s something wrong. Either something is wrong with the quote or it’s a misprint.

13.12 HOW DO I GET A GOOD RATE QUOTE FROM ALL MY COMPETING LENDERS?

There are four things you must absolutely do in order to compare apples to apples, or mortgage quote to mortgage quote:

1. Get your rate quotes on the same day, at the same time of day.

2. Get a rate quote on one loan program only.

3. Get a rate quote for a time frame long enough to cover your transaction.

4. Get a quote for all the lender fees associated with that rate.

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1. Get your rate quotes on the same day, at the same time of day.

If you don’t do it at the same time, then at 9:00 a.m. in the morning you may get a rate quote from one lender and at 4:00 p.m. another quote from a different lender. If there’s been a price increase during the day, then the rate the lender quoted in the afternoon may be higher than the rate you got in the morning. The fact is that both lenders’ rates are higher if rates went up during the day. During times of high market volatility, I’ve seen interest rates change as much as three times a day. Maybe more. This means that the interest rate quotes I made in the morning are no longer any good. Lenders price their competing loans on the very same index. You won’t find one lender at 6 percent and another at 7 percent on the exact same loan under the very same terms. Forget what the advertisements tell you; it just won’t happen.

2. Get a rate quote on only one loan program.

There is no way to compare a 30-year fixed loan with a hybrid. They’re two different animals. You must determine beforehand, absolutely, the mortgage loan program you need and get quotes on that exact loan. Some loan officers can’t compete on certain loan programs, or one lender might have a promotion on a particular type of loan that they’ll try and steer you toward. If you call a lender and ask for their rate on a 30-year fixed rate, but that lender hasn’t been very competitive in that market, they may try and suggest another product. They’ll ask, “Tell me, how long do you intend to keep this mortgage?” or some other question to try and find an alternate product you might be interested in. For instance, you tell the loan officer you’re only going to be in the house for three to four years and guess what, the loan officer says, “I have a special loan program (a hybrid) that’s fixed for three or four years at a much lower rate. Would you like me to quote you on that instead?”

When the interest rate on hybrids is much lower than a 30-year fixed, it’s tempting to sign up immediately and feel lucky at finding such a great deal. But your journey of finding the best rate just ended there because you changed the course of your search. If you get a low hybrid quote instead of a 30-year fixed rate, make absolutely certain you immediately contact other lenders and get their quote for that same hybrid as well. You may find that when one lender is competitive at one program they’re competitive on others, too.

3. Get a rate quote for a time frame long enough to cover your transaction.

Today’s rate quote might be a steal, but it will only last for a short time, say, five days. If you can’t get your loan approved and closed within five days, then what good is the rate quote? No good at all. That’s a common trick some loan officers use when quoting interest rates. “My rate today is 3 percent, but that’s only good for loans currently in our system ready to go to closing. If I had your loan in my closing department today, I could offer you that rate, but alas, I don’t.”

Don’t fall for it. In your head you’re thinking, “Wow! This company has super-low rates! I’d better get my loan in with them as soon as I can!” But you’re forgetting that lenders can’t be that much better than everyone else because they set their pricing using the same index. If you do fall for the trick, you’ll also find that when you get ready to go to closing, the lender’s rates turn out to be just like everyone else’s. And probably a little higher. Instead, get a rate quote that will cover your transaction. If you close within 30 days, then get rate quotes covering a 30-day period. If you need 45 days, get 45-day quotes.

4. Get a quote for all the lender fees associated with that rate.

A lower rate means little if it costs you more to get the rate. Some lenders and brokers offer lower rates but stack the transaction with closing fees. Who cares if the money comes from an origination fee or from a variety of junk fees? It still costs you the same. Getting a quote with associated fees is perhaps the most difficult part of comparing various offerings. It can get confusing, especially when you’re comparing to no-point quotes and one-point quotes.

For instance, you call lender A and you get a quote of 7 percent with 2 points, and then you get another quote from lender B at 7.5 percent with zero points. Still later, lender C quotes you 7.25 percent with one point, and finally lender D quotes you 7.375 percent with 1.5 points. Confused yet? Sometimes a loan officer will do just that—try to confuse you. And try to convince you they have the better deal simply by trying to muck up the process.

To keep this from happening, simply ask each lender for their 30-day quote and 30-year fixed rate, and then specify for:

Your rate with no points and all lender/broker fees

Your rate with one point and all lender/broker fees

Your rate with 1.5 points and all lender/broker fees

Your rate with 2 points and all lender/broker fees

Notice I didn’t say anything about nonlender fees, such as title policies or tax escrows. Nonlender charges will remain the same regardless of who places the mortgage. Your hazard insurance policy will be priced the same whether you choose lender A or lender B. The same is true for other nonlender fees, such as a document stamp or settlement charges. These charges will be what they will be, so don’t confuse the issue by including them in your lender comparison.

Now you finally can compare apples and apples. You have a quote from each lender covering the exact same type of loan. Take your two best quotes and move forward.

13.13 WHAT DO I DO WITH MY TWO BEST QUOTES?

Compare the APRs on each offering, then ask for concessions. Yes, you’ve worn them down and made them compete against other lenders, but you still need to negotiate one more time. Approach them like this, saying, “I really like your rate and your company, but I’m not ready to pick a lender. If you’ll waive your $300 processing and $300 administration fees, I’ll lock with you today.”

13.14 HOW DO I LOCK IN MY MORTGAGE RATE?

You have to specifically request an interest rate lock, because it’s not automatic. Just because your good-faith estimate has a rate on it doesn’t mean that’s what you’re getting. Getting your interest rate guaranteed means that you “lock” that rate in. It’s set. Throw away the key and get on with life.

Your interest rate quote is no good unless it’s locked in with your lender or broker. And there may be as many ways to lock in a loan as there are loan programs, because there is no universal policy. If you call lender A and ask for a rate quote, don’t expect to get that rate until you get a lock agreement from them. You also need to lock in the rate allowing for enough time to close the deal, and you must follow your lender’s lock instructions.

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Lenders are required to provide you with a document explaining their interest rate lock guidelines; the document spells out when you can lock and under what circumstances. Once you do lock your loan, you will receive your lock agreement.

A lock agreement is an understanding that the interest rate you agreed to will be presented to you at closing. But there’s a little more to it than that. There is some due diligence required on both the lender’s and borrower’s part.

The lender or broker will most likely require a loan application from you, signed by you and placed on file. This loan application must be “official” as we explained previously (see Chapter 1). It needs to include your name, Social Security number, income, property address, loan amount, and estimated value of the subject property. Many years ago, consumers could call different lenders and lock in at one place, lock in at another, and lock in later on at still a third—without even having to turn in a loan application. Not so anymore. Mortgage rate lock-ins are serious business for lenders.

Once you lock in a rate for a mortgage loan, there are people down the pike who know about it. They’re the people working in the mortgage company’s secondary market department. One of their jobs is to reserve a place for you at the mortgage rate table you requested. Many secondary departments intend to sell your loan later on, and when you lock in an interest rate at, say, 5 percent, then they count it. If they lose your lock, they have to replace you with someone else.

Still other secondary departments have no intention of selling your loan, but they need to know what rate you’ve locked in at so that they can better manage their loan portfolio. Lenders take locks just as seriously as you do, if not more so. Getting your loan application in with the lender or broker is a typical requirement.

Some lenders or brokers will ask for money at this point, either as an “application fee” or to pay for your appraisal before they lock in your loan. Appraisals can cost $400 or more, and if you don’t pay the fee and end up closing with someone else, that lender has lost the $400 right out of the gate.

There are also performance issues a lender wants to see. In lock agreements, you will be asked to provide information in a timely manner to give the lender time to process your loan. If you apply on the first of the month for a loan scheduled to close on the fifteenth, then you’ll be asked to provide your documentation immediately. If you don’t turn in your pay stubs or bank statements until the fourteenth, your lock agreement won’t be enforceable. You didn’t perform.

13.15 DOES MY LOCK MEAN I’M APPROVED?

No. A common misconception is that a lock agreement is also a loan approval. It’s not; it’s an interest rate guarantee. If you lock in a mortgage for 8 percent and then get declined for the loan, you don’t get the loan or the rate. A rate lock isn’t a commitment to lend, but rather an agreement that should your loan be approved you’ll get the agreed-upon interest rate. It’s also an agreement to offer a rate that’s not just based on an approval, but on the specific loan program you’re requesting. If you lock in a 30-year rate but the lender later discovers the purchase is a four-unit investment property, then your rates will change. Or perhaps there’s a credit issue that needs to be addressed. Whatever the case, understand that a lock agreement and a loan approval are two different things.

13.16 WHAT HAPPENS IF MY RATE LOCK EXPIRES AND I STILL HAVEN’T CLOSED MY LOAN?

Be prepared to get the higher rate, either whatever rate you locked in or the prevailing rate. Most lock agreements will explain this requirement, but you need to understand it before you get much further. Several years ago I had a closing scheduled for the end of the month for a client who was a little tardy in getting his documentation in. And that’s putting it nicely. He locked in for 30 days, but a few days after his lock he saw that rates were drifting downward. When our office called him and encouraged him to send in his pay stubs, bank statements, and so on, somehow he never got around to it. With about 10 days left until closing, I called to warn him that we were getting dangerously close to missing his closing date. He said, “Yeah, that’s what I’m counting on. I want my lock to expire so I can get the lower rate.” I reminded him to read his lock agreement and, sure enough, it said, “If your lock expires you will get the higher of your locked rate or the prevailing rate at time of expiration.” He wasn’t all that pleased about that, but you can bet he got his documentation in within hours.

13.17 WHAT HAPPENS IF I LOCK AND RATES GO DOWN?

There are a few options available to you when you lock in your interest rate and rates move down immediately afterward. If you have a float-down feature in your lock, you can use it. If not, you can try to negotiate with the lender or broker.

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Again, lenders take locks just as seriously as you do. If you locked in your rate and rates jumped up immediately afterward, I can guarantee that you won’t get a call from your loan officer wanting you to break your lock and relock at the new, higher rate. But there are programs designed to protect the consumer when rates fall after locking in.

Some loan programs have what is called a float-down feature that allows you to lock in one rate but, if rates fall during your lock period, to relock the lower rates sometime during your loan process. There are a few variations on this theme, but typically you can relock your loan just one time during the lock period. Some lenders require this relock period to be during a specific window during the lock and not just any old time during the loan approval process; others ask for a fee when relocking a rate, and some won’t let you relock unless the interest rate falls by a certain percentage. Some lenders do all three.

Many lenders offer a float-down feature on almost any loan they offer, but your starting interest rate might be higher than their best offering. In other words, “Yeah, I’ve got a float-down for ya, but the rate’s a little higher.” This is not uncommon. Lenders are fairly good about risk—that’s their business. If they’re going to give the consumer a little extra, you can bet they’ll try and offset that risk with a little more yield. If you talk to a lender who offers a float-down, ask if the rate would be reduced if you didn’t want the feature.

When you work with a mortgage broker, there is another way to get out of a lock. When you lock with a broker, the broker then locks with a lender. If you lock at 8 percent with a broker and rates fall to 7.5 percent thereafter, ask the broker to lock you with another lender. The broker may or may not be inclined to do that. Brokers maintain special business relationships with their wholesale lenders. In fact, wholesale lenders track something called a pull-through rate, which is the percentage of loans that close that have been locked by a broker. If a broker locks with one lender and sends the loan somewhere else, you can bet the broker will be asked about that loan. If brokers break a lock too many times with a wholesale lender or don’t send them the loans they promised, it’s possible the wholesale lender won’t do business with them again. But if rates do drop after you’ve locked with a broker, then why not ask? It’s your mortgage, not theirs.

In practice, simply asking the broker to break your lock can be used in other circumstances as well. If you locked with a mortgage banker and rates have dropped, ask them for the new lower rate. Why not, right? But there are a few things that have to come into play before your lender will get your rate reduced. The rate drop must be more than a few basis points. Lenders won’t negotiate with you after you’ve locked if rates have only come down 1/8 percent or so. Even a 1/4 percent drop isn’t enough. But if rates have dropped 1/2 percent or more, then you’ll probably get a favorable ear. Why?

Lenders know that if you stop your approval process with one lender and move it somewhere else, that takes time. Time you may not have to move a loan around. There is also some risk involved. Since most lenders or brokers won’t lock you in without a loan application, rates might shoot back up in the time it takes to make a new application somewhere else. Another reason a lender might not negotiate is due to the proximity of your closing date. If your closing is within the next week, it’s likely you won’t have enough time to close elsewhere. If your closing is a couple of weeks away, then your lender might find some room somewhere to reduce your rate.

Lenders and brokers do a significant amount of work on a loan closing before they ever see any money. If the loan doesn’t close, they’ve lost money on the deal. In fact, due to the initial overhead lenders incur during the loan approval process, it sometimes takes a year or more after the loan closes before the lender breaks even on the entire loan. That said, if rates drop, perhaps the easiest way to get the lower rate is simply to ask. It goes something like this: “Hey, I know you’ve already done a lot of work on my loan, but rates have dropped by almost 1/2 percent since we’ve started. I understand our lock agreement, but you also have to understand my position. I still have plenty of time to take my loan elsewhere. What do you say we break my old lock and get a new, lower rate?”

Simple enough, right? One of two things will happen. One, nothing will happen. Your lender declines your offer, and now you have to decide if you want to start all over somewhere else. Two, and perhaps the more likely scenario: Your lender agrees with your logic, breaks your lock, and gives you a lower rate. It may not be at the lowest rate currently available, but the lender may meet you halfway, or drop the rate somewhat and charge you a relock fee.

One final note on locks. You have much more freedom with regard to rates and fees during a refinance period compared to buying a house. If your initial purchase contract says that you’ll close within 30 days, you don’t have the luxury of shopping your mortgage around till the cows come home. At maximum, you should give yourself two full weeks of mortgage processing time. And this is only if you’ve already been approved by your lender and provided them with all required documentation. On the other hand, if you’re thinking of refinancing, then you pretty much control the entire process. If you want to lock this week and close the next, fine. If you don’t want to lock and are willing to wait another six months for your target interest rate, then that’s fine, too.

All the rate lock strategies in the world are constricted by time when you’re talking about a purchase. Remember to keep yourself from being under the gun, so to speak. If you mess around too much, trying to outsmart everybody, you might find that you got a terrible deal only because you waited too long to choose a lender. Then the rate is less important than missing your closing date—and possibly your earnest money.

13.18 WILL LENDERS DRAG THEIR FEET TO MAKE A LOCK EXPIRE?

You may be the victim of someone trying to squeeze a little bit more out of you by using market gains. If you’ve been cruising along with your 30-day lock agreement and you’re at day 20 and haven’t heard from anyone like the appraiser, attorney, or settlement agent, it’s possible your lock is going to expire before you can get to your closing. Market gains only work for the loan officer if mortgage rates have fallen since you locked in. If you’re suspicious about your loan delays after you’ve locked, then call your loan officer and ask them directly: “You locked my loan in at 7 percent. Have you officially locked me in, or are you trying to make a little extra money?” Believe me, if your loan officer has indeed been playing the market with your loan, this question will put a stop to that nonsense.