Mortgages

A Higher Price for Rate Locks

 

By BOB TEDESCHI

Published: February 20, 2009

LOCKING in a mortgage rate gives borrowers some protection from sudden spikes in interest rates, which not only helps them save money over time but also provides peace of mind.

The credit crisis hasn’t removed this option — mortgage brokers and bank loan officers will still freeze rates on a loan. But borrowers looking for such guarantees these days face more hurdles and higher fees, especially if they need to lock in a rate for more than a month.

The shift is part of the industry’s more conservative business approach, said Michael Moskowitz, the chief executive of Equity Now, a mortgage broker and direct lender based in Manhattan.

Only a few years ago, Mr. Moskowitz said, “during the last ‘refi’ boom, lenders were locking in people willy-nilly, no questions asked. But things have shifted, because lenders are more attuned to the bottom line.”

Indeed, before the credit crisis, lenders were doing such brisk business that many of them seemed to care little if they spent time working on a loan that ultimately fell through. But because lending standards were so liberal, few loans actually did.

Loan officers will more carefully scrutinize applications now, to ensure that borrowers can qualify for a loan, according to Mr. Moskowitz and Matthew Hackett, Equity Now’s underwriting manager.

“Nowadays,” Mr. Hackett said, “a high percentage of people don’t have the income or assets or equity in their homes to qualify for a mortgage.”

He says he requires a recent pay stub to help prove a borrower’s income. And a pay stub showing big overtime payments may not help much, he added, because companies are likely to cut back on overtime pay as the recession deepens.

Before the credit crunch, an oral estimate of borrowers’ earnings and home values was often enough for many lenders and brokers.

Mr. Hackett says he also conducts an informal appraisal of the home’s value before offering to lock in a rate. Lenders typically rely on industry sources for such information, though they will sometimes also check online sites like Zillow.com or Realtor.com to create rough estimates.

The cost of a rate lock is usually built into the lender’s fee, which is expressed in “points.” An up-front charge, a point is equal to 1 percent of the loan amount. For a 30-year mortgage of $250,000, for instance, Equity Now’s borrowers with good credit would have received an interest rate of 5.125 percent earlier this month and would have paid a point, or $2,500, to lock that rate for 30 days.

Thirty days is usually enough time for borrowers and lenders to compile and process the documents needed to complete a loan. But Mr. Hackett says more complicated loans, like those involving co-ops, can often take longer. This is also the case, he said, for so-called consolidation and extension mortgage agreements, used by those who are refinancing their loans.

Before the credit crisis deepened last year, Mr. Hackett said, borrowers would have paid 1.25 points to guarantee an interest rate for 60 days. Now, he said, the price is 1.75 points.

Consumers can help avoid delays, and more costly rate locks, Mr. Hackett said, by gathering their W-2 documents from employers from the last two years, plus a pay stub.

“You’ll get locked much quicker that way,” he said.

And if rates happen to fall while the application is being processed? Borrowers are still required to accept the rate they locked in. They can go elsewhere, and forfeit any fees already paid, but in the current economic climate, there is no guarantee that their new application will get approved.