Here’s the scoop: mortgage rates are determined by mortgage bond prices. Mortgage bonds trade in what’s known as a “To Be Announced” (TBA) market. When you commit to a rate lock, the lender is agreeing to deliver your mortgage to the bond investor within 30 days, 45 days, etc. That’s where rate lock timeframes come from. So in essence, bond investors are trading empty buckets of mortgages that are scheduled to be filled within certain timeframes. (For a current look at the mortgage bond market, see our Live Market Update page).
When your mortgage loan takes longer than expected to close, the mortgage lender is assessed a fee by the bond investor that basically says: “You promised to place this mortgage in my 30 day bucket, but now I have to dump that mortgage into my 45 day bucket. So you need to pay the same higher price as all those other loans in that 45-day bucket. In addition to that, I’m going to charge you a fee for the privilege of changing buckets at the last minute.”
THAT, my friend is why you need to pay a rate lock extension fee – even if rates are the same or better than when you initially locked your rate. Here are three things you can do ahead of time to prepare:
- Lock your rate for a longer timeframe than you anticipate needing (45 days vs. 30 days, etc.).
- In the rate lock agreement, get a written commitment from the lender to underwrite and process your mortgage within a certain timeframe once you provide all the requested information.
- Turn in all your documents BEFORE you start shopping for a house. Although the lender can’t require you to do so, you can volunteer to do so. This may be in your best interest if it would help reduce the risk of rate lock extension fees, or if it would shorten your rate lock period once you do find a house.