In the article Volatile Mortgage Rates to Persist Until Year-End, Analyst Says, Alexis Leondis discusses some of the effects of a rough month for mortgage interest rates, which has had up to 5% daily and 10% weekly changes in the cost of mortgage financing.  What does that really mean?  When the average mortgage interest rate rises from 5.875% to 6.625% the cost of borrowing increases by 10% in the monthly payments alone.  Generally, a 5% move usually happens in 7-14 days, not just from one day to the next, but lately, there have been enormous swings daily, and even intraday.        

As quoted, I noted several strategies to beat the volatility, foremost of which is contractual caps to the amount of your obligation.  The second is “having the loan originator not lock in a rate until the loan is nearer to closing, because borrowers may receive a better rate if rates decline.”   and needs some clarification.  A “Rate Lock-In” determines the loan price over a specified time to close.  There are different lock periods by lender, and the status of the loan.  When I take a loan application, I typically work with the borrower to select the rate and terms that fit their needs the best.  Unless specified by the client, or myself while settling the terms, the rate floats to market.  This means that while we talk, the rate can change, and from one day to the next, you are exposed to the movements of rate that are tied to the bond markets.  Once a rate is settled, there are multiple pricing systems of different lenders, each unique.  When it is specified between myself and the borrower, or if the offered rate is at “PAR” (0% pricing from bank to broker, 0% pricing from borrower to lender) and priced to lock in by date (30-45-50 days, are typical time periods), it is house policy for most mortgage brokerage businesses to request an immediate “Rate Lock” from the investor on that loan.  The 30 day rate lock is what lenders use in determining the current pricing because a typical loan process runs 28-30 days.  This is where the loan status comes into play, because only approved loans can take 15 day locks with better pricing!

There are actually 2 different types of loan rate locks that banks offer, Best Efforts (B/E) or Mandatory Delivery.  As you would imagine, B/E means just that, if you don’t deliver, there can be a penalty to price, but not a material cost.  For a Mandatory Delivery, the loan seller must deliver to the loan buyer during the specified period, with penalty for fallout (no closing =a late fee or loss of lock or both).  However, in compensation for accepting Mandatory Delivery, there is a major price discount given to the Mandatory Deliverer over the B/E loan seller.  As a lender, you can request either type of lock, and even over a longer time period.  As a broker, the lender will allow a Mandatory Delivery lock ONLY when the loan application is fully approved(appraisal and income reviewed and passed), and get a 25 basis point price improvement to the loan, even if rates are the same from start to finish.  If the rates are better when the mandatory lock is made, the broker can earn extra money based on the rate improvement, and the extra discount for the shorter, mandatory lock in.   

The way that a consumer can benefit from this when negotiating a loan is as follows:

  1. Discuss with your broker / loan originator to have a par + 1% price on the loan – in other words, you want the lowest rate, and are willing to pay a 1% loan origination fee to the mortgage broker.  
  2. Using Bloomberg’s interest rate page try to determine if that day’s rates are up or down on the 10 year T-Bill, the basis rate for mortgage loans.
  3. Ask the broker if they think that rates are high for the week or low.  If he thinks they are low, then lock in when you apply.
  4. If the rates are high, get a quote, but you are committed to the loan, tell the broker that you are willing to float the interest rate.  
  5. Proceed with the application process
  6. Once you are approved, compare the 10 year rate to the rate you got at the start, typically, the 15 day lock will make for that improvement to current pricing, so even if the rates are the same, you should get a better rate when you lock in.