Is it Wise to Float?

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August 24, 1998, Revised November 14, 2006
"I don’t close on my house for 120 days and it would cost 1.25 points to lock the rate and points for that long… I decided to take the risk and let the rate and points float with the market. As I see it, the points on my loan have to rise by more than 1.25 before I lose and if the market doesn’t change at all, I will save 1.25 points. I’m willing to take the risk of a large increase in points, which I view as unlikely. Please comment on my logic."

It is sound, as far as it goes, but it doesn’t go far enough. What your logic overlooks is that the price that will be quoted to you prior to closing -- call it the 5-day price because you will be obliged to lock 5 days before closing so all the paperwork can get done -- is a negotiated price, and with your home purchase on the line you will have very little negotiating clout. Hence, you may end up paying more than the 5-day price prevailing at the time your loan closes, without having enjoyed any protection against rising market rates.

If the market doesn’t change, the cost of your loan should be lower by the price difference between a 90-day and a 5-day lock. However, while the market may not change, your situation will -- for the worst. Your bargaining power is gone. With your closing due in 5 days, you have no choice but to leave the dance with the loan provider who took you.

When you wait to lock until a few days before closing, the loan provider will tell you that you will get the "market price" at that time. What he will not tell you is how the market price will be determined. The problem is that, with exceptions noted below, when the time comes to lock, the "market price" is whatever the lender or broker says it is.

Borrowers who are refinancing can always bail out if they have reason to believe they are not getting a fair shake when they lock. Home purchasers with a scheduled closing, however, inevitably reach a point of no return where it is too late to begin the process anew.

To protect themselves, I recommend that borrowers not float past the point where they can bail out and shop elsewhere unless they can pin down loan providers on an objective procedure for determining the market price when they finally lock.

The appropriate rule is that the market price will be the price that the loan provider quotes to potential new customers on the same deal on the same day. I call this the "twin sibling rule". To make this work, however, the loan providers must agree to it in writing, and must be willing to disclose the relevant numbers on their price sheets. The only loan providers that will commit to do this are Upfront Mortgage Brokers.

An alternative approach is to deal with an on-line lender who discloses mortgage prices on the screen so borrowers can monitor them every day including the day they lock. This only works for borrowers who can price their transaction on the lender’s site, which excludes those with poor credit and those who have serious problems in documenting their income. See Shopping For a Mortgage On-Line.

Copyright Jack Guttentag 2006