Buyers Start Your Engines… Let The Rate Lock Race Begin

Buying a home has always been stressful. You search, sign a contract, put a deposit down and hope for the best. But now, since the Great Recession, it’s a race against the clock to close in 60 days. If you don’t, your bank is going to charge you hundreds of dollars in fees. Consumers make an agreement with their bank commonly known as a “rate lock” to secure their interest rates at a specific level. This enables you to lock in your interest rate so you know what your rate will be when it’s time to close. “Interest rate lock in agreements between lenders and borrowers are typically 60 days,” says Rob Fetten of DE Capital Mortgage.

The loan is then sold and included in a pool of loans the day it’s locked with government-propped agencies Fannie Mae and Freddie Mac. According to Lenny Holler, also at DE Capital Mortgage, if you don’t close in those 60 days, you pay to extend your rate, approximately .125% per week at Wells Fargo. That’s $625 per week  for a $500,000 loan and at some banks it can be more. One little detail to keep in mind: it takes at least 90 days to close on a coop.

Just to recap, your bank knows that it will take you 90 days to close, only gives you a rate lock of 60 days, and then charges you hundreds of dollars a week for the interim. God bless America. “Ironically,” says Mr. Fetten, ”the delayed closing is the result of the government’s new regulation imposed because of the sub prime collapse,” and what some call excessive documentation and verification practices. More ironically, the charges for extending the rate lock are actually coming from Fannie Mae and Freddie Mac, not your local bank. So in essence, who’s getting the money when your rate lock expires? You guessed it, the government.

Photo Credit: yomanimus

Your bank knows it will take you more than 60 days to close and charges you hundreds of dollars in the interim.

Congress oversees the government agencies Fannie Mae and Freddie Mac. These entities are both bankrupt and living off tax payers money. So actually the consumer is losing  three times. Once for their tax dollar being utilized to bail out the agencies, once for the delayed processing and regulatory red tape to get the loan, and a third time to pay for the rate lock extension that Fannie and Freddie charge.

As a broker I think to myself, what are the angles so I can help my clients? There are no good angles. If you don’t pay to extend your rate lock you will lose your loan.  If you lose your loan you either have to start the whole process over again or you can lose your deposit. You may wonder, why can’t I lock in my rate later?  Doing that is probably the best answer, except now you are watching the interest rates every day and watching your monthly payments rise above your means, then down again, waiting for the right moment to lock it in. That’s a stressful way to live. Even if you time it perfectly, what’s to say that the board won’t take longer than expected or the seller decide to stall on the move-out date?

The bottom line is, there are no good answers. Just stay informed, have the right people around you and hope for the best. This is the post Lehman era, you gotta love it.

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