Mortgage Refinance Guide

Locking in your mortgage rate can be a source of confusion and frustration for many homeowners. When and how do you lock in your mortgage rate? How do you know that your mortgage broker really locked in your rate? Mortgage rates change on a daily even hourly basis; if you miss the opportunity to lock you could lose that low mortgage rate your broker promised you. Here are several tips to help you understand mortgage rate locks and what they mean for your home loan and your bottom line when refinancing.

What Does Locking Your Rate Mean?

When you choose to lock your rate, a process you must initiate yourself, your broker “locks” your mortgage rate with the wholesale lender. The idea is to hold that rate long enough for you to close on the loan. Your broker sets the lock on your behalf with the wholesale lender…more importantly the lock determines the amount of Yield Spread Premium on your new home loan.

What is Yield Spread Premium?

Yield Spread Premium is a percentage of your loan amount created when the broker locks you with an above market mortgage rate. Your broker knows the wholesale mortgage rate that your lender approved you; however, they mark up this interest rate to get a commission from the lender. This commission is called Yield Spread Premium and if you want the best possible mortgage for the long term you need to avoid this commission based markup.

If you plan on living in your home for the long term does it make sense to be constantly refinancing your mortgage loan? Mortgage rates are currently and historically low levels…You’ll probably never see rates below four percent that aren’t teasers. With this in mind doesn’t it make sense to lock in a great rate now and keep it for the long haul? If this is what you’re trying to accomplish you’ll want to lock in a wholesale mortgage rate. Before you can get a wholesale rate you’ll need to understand how mortgage brokers are compensated for originating you loan.

How Are Mortgage Brokers Paid?

There are several ways your mortgage broker gets paid (often overpaid) for their work on your home loan.

Many brokers tell you that they’re not charging you origination fees because of Yield Spread Premium. Does it make sense to take a higher mortgage rate instead of paying a one percent origination fee when you plan on keeping your home for the long term? Absolutely not…If you plan on living in your home for the long term you want a wholesale rate and you only want to pay a once percent origination fee.

How Do You Lock Your Mortgage Rate?

Before you decide to lock in your mortgage rate you need to be sure that you’re working with the right mortgage broker. Talk to your broker about the rate you qualify based on your financial details. Did you know it takes sixteen pieces of your financial details to accurately quote a mortgage rate? If your broker has not asked for detailed financial information before quoting you a rate you can be certain that they have no intention of honoring that rate.

Talk to your broker about their compensation. This includes the origination fee, broker’s fee, and any Yield Spread Premium they get from marking up your mortgage rate.

Remember that a reasonable amount to pay for loan origination including origination points and fees should not be more than one percent of your loan amount. Ask your broker for an updated Good Faith Estimate on a daily bases; remember that mortgage rates are always changing.

Before you make the decision to lock your mortgage rate make sure you have an updated Good Faith Estimate from the same day.

Finally, after you’ve instructed your mortgage broker to lock make sure they email you the rate lock confirmation from the wholesale lender. This confirmation will show you the rate, points, and any Yield Spread Premium associated with your loan. You should have this confirmation within one hour of locking…if you don’t get it contact your broker immediately. Make sure that you get the rate lock from the wholesale lender. Don’t accept anything typed up by your mortgage broker on their own letter head as this is not a guarantee of anything and you want to see if there is any Yield Spread Premium included in your lock.

You can learn more about refinancing your mortgage with a wholesale rate while only paying a one percent origination fee by registering for my free mortgage refinancing videos.

Since mortgage rates have been in near freefall this week several people have asked me about breaking mortgage rate locks. Here’s the skinny you need to know about locking in your mortgage rate.

While most mortgage brokers will tell you that a rate lock is an agreement between you and the lender that you cannot walk away from, the truth is that you can and the pressure you mortgage broker is applying is a load of crap. Can’t say that I blame them, after all their commissions are on the line…but the truth is you can walk away from the table at any time…Even After You’ve Signed The Contract.

Mortgage Rate Locks

What is a mortgage rate lock? Really all rate locks are is a “promise” from your lender to give you a certain mortgage rate if you close before the lock expires. Are mortgage lenders obligated to honor their rate locks?

The answer may surprise you… No, lenders are not obligated to honor thier own rate locks. Mortgage lenders build so much wiggle room into their rate locks they can back out of them almost at will. You’re not signing a contract when you lock in your mortgage rate but if rates go down 99% of lenders will not give you the lower rate.

If your mortgage lender refuses to give you the lower rate why should you stay? A mortgage is a huge financial commitment and you should make sure you’re getting the best possible deal before signing on the dotted line. Don’t ever let a mortgage broker or lender pressure you into thinking that since you’ve locked in a mortgage rate you’re obligated to take out the loan. This type of pressure sales is not only unethical but a despicable practice.

Your Rights Under The Law

You can walk away from the table at any time. If you’re being pressured by a broker or your gut tells you something isn’t right, walk away. Mortgage brokers and lenders are a dime a dozen and there are honest people working in this industry that want to get you a good deal in exchange for your business. What can you do if you already signed the loan contract? You still have time to change your mind. There are three business days before your loan is funded that you can change your mind and walk away from the deal. See Three Day Rescission for more information about backing out before your loan is funded.

To summarize, a rate lock does not mean you are obligated to borrow. Never let anyone pressure you into any type of loan…this is a sure recipe for disaster. Do your homework, learn about Yield Spread Premium and make informed decisions when it comes to your mortgage. All the information you need to do this is available for free on this website. There is absolutely nothing for sale here…the articles and mortgage videos are all free.

If you’re in the process of refinancing your mortgage you might be losing sleep over your rate lock. Last week mortgage rates rose from 5.6% to 5.8% almost overnight. If you didn’t lock your rate in writing you’re looking at higher mortgage rates this week. Here are the basics you need to know about locking in your mortgage rate when refinancing.

Locking in Your Mortgage Rate

The purpose of a mortgage rate lock is to hold the interest rate you agreed long enough to give you time for closing. You must have written confirmation of your rate lock or you do not have an agreement with the lender. Even when you get your mortgage rate locked in writing, rate lock agreements guarantee very little and are usually structured so that the lender can change the agreement at will. Despite this lack of confidence in your lenders written word it is still better to lock in writing than not at all.

What Documents Lock in Your Mortgage Rate?

Once you notify your broker that you want to lock a specific mortgage rate you should receive a written rate lock confirmation from the lender. This document will be faxed, emailed, or created online for your broker confirming the lock. Your rate lock outlines the terms of your mortgage including rate, points, Yield Spread Premium and the expiration date of the lock.

Make sure that this document comes from the lender, not your mortgage broker. Your broker can never guarantee a rate that isn’t locked by the wholesale lender. A common bait and switch tactic used by many brokers is providing bogus or doctored rate lock confirmation and then switching you to a higher priced loan offer when the deal falls through. When this happens a dishonest mortgage broker will often blame you and say the rate lock expired because of something you did.

Your mortgage broker may also give you a doctored rate lock confirmation because their markup of your mortgage rate will be clearly displayed on this document. This commission based markup of your mortgage rate is not only completely unnecessary but is completely dishonest in most cases. You can learn more about protecting yourself from shady mortgage brokers with a free mortgage refinancing DVD.

Mortgage rate locks are supposed to protect you from rising interest rates while your loan originator prepares the documents necessary to close on your loan. What happens when your mortgage rate lock breaks? Broken locks occur when you aren’t able to close before your designated lock period expires. Ones your lock breaks the wholesale lender that approved your loan is no longer obligated to honor the mortgage rate you were approved.

What happens with the lender when you haven’t closed when your lock expires? The broken lock creates a problem for everyone involved. It’s more work for the broker, although some will argue they don’t do enough to warrant their commissions, and the lender has a problem because they’ve earmarked funds for your loan. This money is referred to as “hedged” and is budgeted to fund your loan when you close. If you miss your deadline for closing the lender is out the money they paid to earmark the hedge for your loan. This is why your interest rate goes up when you break your lock.

Suppose you’re refinancing your mortgage at six percent and the broker locked your interest rate for thirty days. You miss the deadline for closing and mortgage interest rates have gone up to seven percent. Even if mortgage rates had dropped you’d still be stuck with the higher of the two rates at six percent if you pursue the loan. If you anticipate problems when refinancing your loan ask for a longer lock period…and stick to it.

What If You Haven’t Locked Yet?

If your loan originator hasn’t locked your mortgage rate you have what’s called a floating interest rate. This is the complete opposite of being locked and your rate will change with market conditions. If mortgage rates go down prior to locking you’ll get a better rate; however, there are no protections in place for you if mortgage rates go up. If you’re in the process of refinancing and haven’t locked in your interest rate in writing, you’re taking a gamble with your loan. For most people the gamble of a lower rate is not worth the risk; have your loan originator lock in your rate, in writing, as soon as possible.

How Soon Can You Lock Your Interest Rate?

When you’re refinancing your mortgage you can lock in the interest rate at any time. If you’re satisfied with the interest rate your mortgage broker quotes you and are certain that it does not include unnecessary markup, ask your broker to lock as soon as possible. Once you’ve locked in your best mortgage rate make sure you return all documents and requests for information in a timely manner to prevent breaking your lock. You can learn more about refinancing your loan without paying too much by registering for our free mortgage toolkit; get started today by clicking the DVD at the top of this page.