Lenders extend the clock on rate lock
Recent fluctuations in mortgage rates are prompting homebuyers to seek longer terms.
Jumbo-mortgage applicants are demanding long-term rate "locks" while they close on their homes. And rather than settle for the standard lock of a month or two, they're asking lenders for commitments of half a year — or longer.
The upside for borrowers is that rate locks provide protection and peace of mind in a rising-rate environment. Without one, they risk being stuck with a higher rate than they were initially quoted and a mortgage costing hundreds of thousands of dollars more over the life of the loan. A jump in mortgage rates can also shrink the total dollar amount available to borrowers.
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The downside: Long-term locks are rarely free. Borrowers who want a rate lock beyond 60 days typically have to pay a deposit. Also, borrowers often aren't locking the current market rate but rather that rate plus a fraction of a percentage point or more.
Rate locks don't typically happen automatically. In most cases, mortgage applicants have to put in the request with the lender, a trend that has been on the rise.
Locked mortgages make up roughly 60 percent of the total pending-mortgage pipeline at New Penn Financial, a mortgage lender based in Plymouth Meeting, Pa., and subsidiary of Shellpoint Partners. That is up from 45 percent in May before mortgage rates started climbing, the company says. EverBank, a national lender, cites a roughly 10 percent increase in jumbo-mortgage applicants locking in rates since June. And Wells Fargo says more of its jumbo applicants are signing up for rate locks earlier in the application process.
Mortgage-rate volatility is pushing borrowers to lock. Rates on 30-year fixed-rate jumbos averaged 3.82 percent in the beginning of May — the lowest this year — and hit a peak of 4.88 percent by mid-September, before dropping again, according to mortgage-info website HSH.com. They are hovering around 4.4 percent.
Most rate-locks last for 30 days to 90 days, but some lenders are extending those periods. In September, New Penn Financial, which provides mortgages of up to $2.5 million, lengthened its rate lock to up to 360 days, from a previous maximum of 60 days. EverBank increased its maximum lock period to 270 days beginning in August, up from 90 days, mostly for borrowers waiting for construction on their new homes to end.
Still, a rate lock alone won't suffice for many affluent borrowers. While rates have been rising, there have been brief pullbacks. As a result, some borrowers have turned to a so-called float-down option — which is essentially the best of both worlds: protection from rising rates and the ability to break the lock if mortgage rates decline by at least an eighth to a quarter of a percentage point. Borrowers typically have to pay a fee to have this option, which often equals around a quarter of a percentage point of the total dollar amount of the loan, says Keith Gumbinger, vice president at HSH.com.
In a sign that homebuyers are gaining more leverage in the mortgage market, lenders are once again introducing so-called lock-and-shop rate locks, which allow buyers to lock in a rate for several months while they shop for a home. Locks were traditionally available only to buyers whose offer on a home had been accepted.
New Penn, which is preparing to roll out this option, will give buyers 45 days to shop for a home while guaranteeing them their locked rate. EverBank says it will soon introduce this feature for buyers for up to three months.
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A hypothetical example shows why locks could be appealing to more luxury homebuyers:
Someone who locked in a $1.5 million, 30-year, fixed-rate jumbo mortgage at 4.34 percent for the week ending June 7 and closed on the loan three months later, would have ended up with a monthly payment that is roughly $466 lower than if he had received a 4.86 percent average rate for the week ending Sept. 6. Over the life of the loan, the lock would have saved more than $167,000 in interest payments. (The average weekly rates are from HSH.com; an eighth of a percentage point was added as a cost to lock the June rate, although that could differ depending on the lender.)
The costs for a lock often include two elements. First, there is a markup, usually adding one-eighth to as much as 1.5 percentage points to the market rate at the time of the lock. Second, lenders could require a deposit, which is typically applied toward closing costs, that ranges from an eighth to 1.5 percentage points of the total dollar amount of the loan. The longer the lock, the bigger the markup or the deposit.
Other issues to consider:
- Missing from the fine print: Many lenders don't say they offer rate locks or float downs but will make them available to borrowers who ask.
- Free extensions: Ask lenders about flexible deadlines. Some lenders will give an extension for free if borrowers need a few more days to close.
- Not for ARMs: Locks are mostly available for fixed-rate mortgages rather than adjustable-rate mortgages whose initial rates tend to be less volatile.
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