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For Sale by Owner Articles • - Mortgages and Financing

Economic Good Times Are Rate Lock Times

By Broderick Perkins
Recent economic indicators of good times are also red flags warning real estate consumers to take steps to hold down the cost of housing.
With consumer confidence nearing record levels this year, the shop-'til-you-drop trend could translate into inflationary pressure on goods and services -- especially mortgage rates.
With a mortgage rate lock, however, you can get the economy to freeze in time hopefully long enough to buy a home before rates get out of hand.
But you'd better move fast.
The mortgage industry is known for jumping the gun and firing off rate hikes in anticipation of Federal Reserve interest rate hikes. Three late December, 1999 economic reports could force the Federal Reserve to raise rates more than expected as early as February, 2000, and lenders could move sooner.
  • The Conference Board's Consumer Confidence Survey index rose to 141.4 in December, up from 137 in November and just shy of the 142.3 record in October 1968. Using a base index of 100 in 1985, the survey is a monthly measure of the public's confidence in the U.S. economy's health.
  • Consumer spending at the nation's shopping malls rose 7.7 percent this year from Thanksgiving to Christmas, compared to the same period last year, according to International Council of Shopping Centers. The ICSC holiday report includes revenue from more than 3,600 stores in 70 regional malls nationwide.
  • Consumers also were buying homes at a record pace. The National Association of Realtors said November home sales were up 6 percent from the month before and 1.4 percent from November 1998. That puts the home buying market on track to be the greatest sales year ever, according to Dennis R. Cronk, NAR president.

In all three instances, consumers' buying spirit has been buoyed by job security, fat salaries, a healthy stock market and low inflation -- so far.
That could change.
Mortgage market experts say those recent economic reports are now likely to cause the Fed to push up both short and long term interest rates by a half percent when it meets in February. Before the new reports surfaced, the popular forecast was a rate hike of only a quarter percent.
With such a likelihood of some rate increase, it's mortgage rate lock time.
Rate locks
A traditional mortgage rate lock is a lender's guarantee that you'll get a certain interest rate, number of points and other cost-related features. The lock is good for a specific period -- if you fail to complete your home purchase or refinance before the clock runs out, and interest rates rise, be prepared to pay the higher rate.
Unfortunately, if interest rates fall during the lock period, you can't take advantage of them unless you rewrite the lock and pay additional costs.
Still, a lock is better bet than no lock, especially when rates become uncertain as they have recently.
You can play and pay for higher stakes with a ''floating'' or ''float down'' lock that grants you a lower rate if rates fall within a given window of time. You lose, however, if rates rise during the period.
Locking down the locks

  • Whatever lock you choose, get the guarantee in writing.
  • Unless your contract says otherwise, a rate lock could also prevent you from taking advantage of lower rates, should rates decrease.
  • Lock in as many of the costs you can, the rate as well as points.
  • If you see a rate you want, set the lock ''on application'' rather than ''on approval.'' On approval means you won't have a shot at rates until the loan application is approved. That could be weeks away, and rates could change in the current market.
  • Shop around for both the terms of the lock contract and its cost. Some lenders may charge you an up-front, non-refundable fee should you withdraw your application, if your credit is denied, or if for some other reason you don't close the loan. Others charge the fee at settlement. The fee might be a flat fee, a percentage of the mortgage amount, a fraction of a percentage point or a higher interest rate. Some lenders also offer the service at no cost.
    The lock's cost depends on the length of the lock-in period, the options you choose and whether to mortgage rate is fixed or adjustable, or if it's a purchase or a refinance loan.
  • The lock-in period should be long enough to allow for settlement, contingencies imposed by the lender or purchase contract and other factors that could delay the process. Anything longer than a 60-day lock could be cost prohibitive.
  • Before deciding on the lock's time period, determine the average time for processing loans and ask your lender to estimate (in writing, if possible) the time needed to process your loan and what documents you need. This way, you can get ready quickly and speed things up. Consider all factors that could delay your settlement, including the time it will take you to provide requested materials about your financial condition, unanticipated construction delays on a new house and the like.
  • Finally, if you have a floater, don't expect the lender to monitor rates. It's up to you to keep an eye on the market.

Broderick Perkins, has been a consumer journalist for 20 years. Experienced in print, electronic, and consulting journalism, he is chief executive editor of San Jose, CA-based, DeadlineNews.Com, an editorial content and consulting firm.

© Copyright 1999 by Broderick Perkins. All Rights Reserved.

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