Weekly Rate & Market Update 11-18-16
Question: With rates having gone higher what happens if I can’t close before my rate lock expiration date?
Answer: Every lender has their own policies when it comes to rate locks and the options when the lock is set to expire, however most have similar policies. Here is a look at how rate locks work and options when facing expiration before you are ready to close.
While everyone wants to close before a rate lock expires sometimes that is not possible due to many circumstances, from a sale escrow falling out, an issue with an appraisal or property condition, or inability to get required paperwork such as a payoff statement from a lender or an insurance policy. When this happens we need to see what is the best option available to extend the rate lock, and in an up-rate market protect you and your payment.
Let’s say that we locked you in on a $400,000 for a conventional purchase mortgage at 3.25% on October 4th for forty-five days and your rate expires today. The cost of the loan when we locked was 1.25 points ($5000). There was an issue with the closing of your current home which is delaying the closing of your new home for ten to twelve days. Rates are significantly higher, today the same lock would be 3.75%, an increase of 0.500% (one-half of one percent) in interest rate, or $112 per month.
There are two options at this point:
1) Let the rate lock be broken. Wait until we are ready to close and re-lock the loan. If this policy is followed then we get the worse of the original lock or the current rate sheet on the day we re-lock in the loan plus one-quarter point in fee. For example if your rate lock expired last week and you chose to float the rate until ready to close and we re-locked today your rate would be 3.75% but instead of 1.25 points the fee would be 1.5 points ($6000), so by float your rate lock extension you lost 0.500% in rate, or $112 per month, and one-quarter point in cost ($1000). That is the risk on floating a rate lock extension, that the market goes up or stays up during the period. On the other side, if you let the rate expire and rates drop over the next ten days to say 3.5% then you would get 3.5% at a cost of 1.5 points, your payment goes up $55 per month and it costs you $1000 more in fees.
2) On or before the day the rate lock expires pay for an extension of the same rate you currently have. A fifteen day extension costs 0.125 points and a thirty day extension costs 0.25 points. You do not have to pay for the extension at the time you make it, rather it will be added to your final closing costs. For example, we know we will be closing your loan in twelve days, we contact the lender and request a rate lock extension for 15 days. Your rate of 3.25% is extended until December 3rd, but since that is a Saturday the rate lock will be December 5th. The cost for the extension is 0.125 points ($500) which is added to your total loan costs, so the total points are $5500 for the rate of 3.25%.
As you can see Option 2 is significantly better than Option 1, even if the market floats back down to or below your original rate of 3.25%. If the market stays the same as it is today your payment increases $112 per month and your costs increase $1000, versus if you take the risk out of the market your payment stays the same and your cost increase only $500 to retain the rate. By paying for the extension instead of taking a chance on the market your costs of the extension are less than five months of payment increases should you float your extension and end up with the higher rate.
What happens in a stable or down-rate market if you rate is expiring? The policy for letting the rate lock expire and then floating is the same, you get the worst case scenario of the rate you were locked at or the current market plus one-quarter of a point. However if we extend prior to the rate expiring our options may be no cost for an extension of 15 days or possibly a rate reduction if the market has improved considerably.
We are not in a stable or down-rate market so my very strong advice is to know when your interest rate is expiring if you are in escrow and locked on your interest rate. As well know the policies for extending your locked rate should it need to be extended.
It has been some time since we have been in a market that has seen mortgage rates increase as high and as fast as we have seen in the past ten days. In the past we heard from several borrowers, and agents in escrow with borrowers, that they thought their rates were locked but in fact their loan originator had not locked in their rate and was floating the market to try to get better pricing for themselves. The rates went up and the borrowers were told their loans could not close before the expiration and then the lender locked them at the higher rate after the expiration.
If your loan is locked there is most likely, almost assuredly, an extension policy for your rate as a nominal cost—typically 0.125 points for 15 days and 0.25 points for 30 days. If you are told there is no extension policy, or that there is a substantial cost for extension, then demand to see confirmation of your rate lock.
With the new disclosure laws the non-lock rate scenario should be non-existent as when the rate is locked you must receive the Loan Estimate indicating when your rate is locked and for how long. If the lender is unable to close your loan by the rate lock expiration and then indicates the cost for extending is high, send them a copy of the Loan Estimate and demand to see a copy of the rate lock confirmation for the same day. If they are unable to provide then you have some recourse via the Consumer Financial Protection Bureaus—believe me any lender would rather make sure your rate extension and lock are handled properly than have to explain to the CFPB why they generated a Loan Estimate indicating your rate was locked when it was not.
Rate lock extensions are very important, as you can see it can be costly if your loan is not able to be closed within the rate lock period. Because of this it is critical you provide your lender with all documents they require as soon as possible after they are requested.
Remember, with Dennis it’s not just a mortgage, it’s your complete financial picture.
This week saw some positive economic data released this week—all helping to push rates higher. Retail sales in October were up 0.8% from September, led by auto sales. Higher auto sales signify stronger consumer confidence which signifies economic growth which leads to higher rates. While the Producer Price Index was flat for October, and up 1.6% year over year, consumer prices went up 0.4%, 1.6% for the year led by higher energy costs. Higher prices means inflation which also leads to higher rates.
Rates for Friday November 18, 2016: Rates continue their march higher. As you can see from the chart below we have increased one-half of one percent in two weeks for conforming fixed rates. Going through my past charts the last time we saw rates increase this high in a short period was from May 15, 2009 when the conforming rate was 4.625% to 5.25% three weeks later on June 5, 2009. There are many factors to the spike, including herd mentality from investors and technical trading as well. What will be interesting is the Fed decision in a few weeks. The overwhelming consensus is a rate hike, but some began speculating on a half percent increase in rates instead of just a quarter. With the private and public long term rates increasing by as much as a half percent the Fed may see no reason to go with a large increase since the markets seem to be doing their work for them. One result of the increases will be a slow-down in purchase activity, which means if you are a buyer now might be a great time to go out and make a deal on your new home. In the meantime rates match their highs for 2016—right where we starting on January 1st.
FIXED RATE MORTGAGES AT COST OF 1.25 POINTS
30 year conforming 3.875% Up 0.25%
30 year high-balance conforming 4.00% Up 0.125%
30 year FHA 3.25% Up 0.125%
30 year FHA high-balance 3.75% Up 0.125%
Please note that these are base rates and adjustments may be added for condominiums, refinances, credit scores, loan to value, no impound account and period rate is locked. Rates are based on 20% down (3.5% for FHA) with 740 FICO score for purchase mortgages.
Yeah! Fall appears to have arrived—I can tell because it was about 50 degrees when the dog got his walk this morning and I contemplated some light gloves. I love this time of year with the cooler temperatures, as well the fact that Thanksgiving is upon us.
I hope you enjoy your Thanksgiving wherever it might be.
Have a great week,
Dennis
