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Your Mortgage : Tips on What's New in Rate Locks

March 06, 1994|KENNETH R. HARNEY | SPECIAL TO THE TIMES

WASHINGTON — Any prospective home buyer or seller who's heard about Federal Reserve Chairman Alan Greenspan's late February congressional testimony should carry two words into this spring's market: rate lock.

Greenspan didn't use the words himself. But the upshot of his testimony was that interest rates are probably more likely to go up, not down, as the 1994 economic recovery gains steam. So don't assume the three-quarters of a percent jump in mortgage rates since mid-January is the end of the upturn. To the contrary.

That's why you need to get up to speed on the latest options available in rate locks. For example, you can now get mortgage rate locks that are attached to houses for sale, and that shield potential purchasers from rate increases for up to three months. You can also sign up for rate locks that travel with you as a home shopper, giving you rate protection before you've even figured out what property you want to buy or applied for a loan. When you finally do locate a house, you've got a loan rate guarantee in your pocket--a 7 1/2% mortgage, for example, in an 8% market.

To get a feel for what's new in 1994 rate locks, here's a quick guide. Start with the traditional rate lock concept. When you've found the house you want to buy, you contact a lender and apply for a mortgage. The rate and points on the loan during the weeks or months prior to closing can either float with the market or can be locked in--guaranteed--for a set period of time. (A point is equal to 1% of the loan amount.) Generally the longer the rate-lock period, the higher the points charged at a given rate.

For instance, to lock in a mortgage at 7 1/8% for 60 days might cost one-half a point more than a 15- or 20-day lock at the same rate. The extra half-point is attributable to the greater risk to the lender that rates will rise sometime during the coverage period.

During much of 1993, when mortgage rates trended downward, borrowers frequently opted to float during loan processing, locking in just days before the scheduled closing. That made sense last year.

But floating your quote this year not only exposes you to greater danger of a sudden interest rate spike. It's completely unnecessary to boot, thanks to recent innovations in rate-lock programs. For instance, there's no need to delay a rate lock for the weeks it takes you to locate and sign a sales contract on the house you want to buy. Major national lenders will lock you into current rates while you shop. Or while you negotiate with the seller.

Countrywide Funding Corp., a Pasadena-based mortgage banker active in all 50 states, offers what it calls a "Lock 'n Shop" program for no additional points or fees. Home buyers who are seriously in the market can apply for pre-qualification--that is, obtain approval in advance for a maximum mortgage amount at current rates.

With locked-in financing in hand, they can then shop or negotiate on properties for 30 days. If they've found the house they want during that period, they can then extend the rate-lock for another 60 days on FHA-VA loans or 45 days for conventional mortgages.

American Residential Mortgage Corp. of La Jolla, another large lender active nationwide, offers a 75-day "Lock-Shopper" program at no charge. At any time during the 75-day lock period, the prospective buyer can convert to a 60-day "lockbreaker." That locks in the then-current rate, and allows the buyer to float downward--if rates decline prior to closing--but never to go higher than the locked commitment rate. Cost of the lockbreaker is one-quarter of a point, but that amount is credited back to the borrower at the time of settlement.

Most intriguing of all 1994-model rate locks are those designed to cover--and help sell--specific houses. They provide written, contractual rate protection for any qualified buyer of the locked-in home. For example, say you want to sell your house this spring. You're worried about rising rates, and you want a leg up in marketing your property. Through your listing real estate agent, you may be able to get--and advertise--"rate protection" for potential buyers.

The participating lender essentially guarantees that any qualified buyer of the house will be charged no higher than the locked rate and point quote. Countrywide's version of the program uses the same 30-, 45- and 60-day rules as its "Lock 'n Shop." American Residential's version--currently available in a handful of areas but scheduled for nationwide introduction this spring--offers 90-day buyer rate coverage, at no charge.

The bottom line on rate locks this spring: Check them out. Ask mortgage brokers, mortgage bankers, and real estate agents about what options they can offer. If you can avoid the risk of being hit by higher rates, why not?

Distributed by the Washington Post Writers Group.

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