I have been helping homeowners answer this question a lot lately. It seems that when the stock market took a dive at the end of January long term rates went down for a couple of days but then went back up. So loan brokers and bankers contacted clients waiting in the wings and locked the lower rates during that window. There was lots of added loan activity due to that very short term rate drop, including rate adjustments on already locked loans. Borrowers were offered the opportunity to slide the rate down by paying extra points. Also lenders experienced brokers who locked loans that were not able to be closed. Perhaps these loans were “hopeful” loans that the broker thought ought to close, or perhaps these loans were double-up locks that the broker made to help insure that some lender would approve the loan package. In any case, lenders got zapped with lots of extra activity and a lower pull through ratio than normal. The pull through ratio is the number of loans that get locked that actually fund. Brokers locking loans that do not close actually costs the lenders big dollars. Lender get blocks of funds to lend out from investors during a certain time window and at certain terms. If the lender commits hundreds of thousands of dollars to a certain borrower during the 30 day lock period, but the borrower does not qualify or the loan package is a duplicate and eventually the loan goes to another bank, the lender is really out thousands of dollars. The opportunity cost of committing funds to a loan that does not close is huge.
So the take away for borrowers is that it is a good idea to get your paperwork together and work with a broker or banker to get your loan package complete and ready to go so that when the rates rach a point where it is economical to refinance you can lock and close fast. This means doing you homework on the appraised value of your home in this market. Some values have gone down, so ask your broker or banker to do a product profile. This will include several moarket comparables and be an estimate of the value an appraiser will come up with. Do this before you ask your broker or banker to lock a loan. Also get your financial records organized so you can easily fill out the Uniform Loan Application (form 1003) and supply the backup documents to the underwriter.
I have been offering to do a free product profile analysis and assessment of current loan for prospective clients. This has been very beneficial for them since they know whether or not to be concerned about the need to refinance right away. They are less stressed and are more strategic in their mortgage decision making. Just because a banker says we’ll refinance your loan with no points and no closing costs, do not assume it is the best decision. Some bankers are expecting homeowners to refinance during 2008 and simply want to lock you in to their bank for the refinance. This is not necessarily a bad thing and if you get the right rate at no fees and no closing costs you should be congratulated. But, how do you know it is the right rate? You’ve got to get your broker or banker to help you make a decision based on long term benefits to you, not just a reflexive knee jerk refinance when the rates drop a little bit.
