I have done a lot of loans over a lot of years. I pride myself in making the often-complicated loan process one of ease, simplicity and understanding. I have built my business this way.
However, I have never heard the question I heard today. At first I was just surprised. As the day went I was dumbfounded and perplexed.
This really nice lady, Arlene, whom I did a loan for recently, called to ask me a very simple question.
She bought a new house late last month. We did the loan application just before the New Year, we locked her at 5.500% for a 30 year fixed with a 2 point buy-down, and we closed escrow last week.
Most people don't call the week after they close, so I was surprised to hear from her today after the Fed's half point rate cut.
"Aaron, I see that rates have dropped again," Arlene asked. "Is there any chance the lender will give me the new, lower rate?" Keep in mind, she closed escrow last week and is now in her new home and she wasn't calling to see if she could refinance this quickly.
I spent the next 20 minutes explaining how rate locks work, how loan docs work, what the close of escrow means, but then I was left in astonishment.
"But Aaron, the rates went down," Arlene pleaded. "And I just closed last week. Isn't there some kind of grace period? That's only fair!"
I had to spend another 10 minutes explaining why that wasn't possible.
This is not a dumb woman but it got me thinking "Are the borrowers really that out of touch with what goes on in the loan process?"
Mortgage rates are tied to the bond market. The bond market trades like the stock market trades.
Bonds trade up and down all day, every business day, just like stocks do. This means mortgage interest rates basically do the same. They move up and down all day.
Some days they trade with such small variations that rates don't really fluctuate much. Other days, especially in recent days, they can swing with huge variations.
Last Wednesday, for example, what was a 5.250% 30 year fixed in the AM, was a 5.625% 30 year fixed by day's end.
So, let's say today at 4:30pm, we locked your rate on a 30 day lock. This means if rates go up tomorrow, or the next day, or the day after, or any other day for the next 30 days, you will not be penalized. We won't raise your rate. You are protected from that by locking.
However, if rates go down tomorrow, or the next day, or the day after, or any other day for the next 30 days, you will not be able to take advantage of that.
Locking means your rate is locked in from going higher or going lower, unless there is a dramatic change to your loan program, which is highly unlikely. Or unless you have to extend which is a topic for another time.
Let me give you an example to give you a clearer understanding.
Let's say you want to buy stock in Microsoft. You call your stock broker and say, "I want to buy Microsoft. What is the price for a share today?" He says "It's $32 per share today." You say, "Great! Give me 10 shares!" He then takes the money out of your account, $320, and buys you the stock.
You now own Microsoft for $32 per share.
If Microsoft's stock goes down to $9 per share tomorrow, you can't call the broker up and say "cancel that trade, give me my money back and now give it to me at $9 per share." You have committed at $32. That is basically the same principle as locking your rate. You have committed at the interest rate you locked in at.
The only advice I can give you is the advice I received when I bought my first home.
Don't try and time the market because it rarely works. If you like Microsoft at $32 a share because you think its going to $50, buy it now, and don't wait for it to drop to $25 because it may not get there and you will have missed out on the gains.
If you are happy with a 30 year fixed rate at 5.750%, lock it when you can, because if you are waiting for it to go to 5.250% again, it may never happen either.
Once you lock, if rates go down before you close, don't look back in anger, be happy with what you got.
Once you lock, we won't come to you if the rates go up, please don't come to us if rates go down.
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That's just what happens. Buyers always want the lower rate.