Locked In...or Out?

As a professional financial planner, New Yorker Melissa Levine routinely helps clients guard against unpleasant surprises. But even she has been rattled by the wild ride that mortgage interest rates have taken recently. Since setting out in early June to refinance the loan on her co-op apartment, Levine has watched interest on a 15-year fixed-rate mortgage shoot up from 5% to 6%. Although she initially locked in the lower rate, a delay in the processing of her application could have meant missing the 60-day processing deadline and getting stuck with the higher prevailing rate and a bigger monthly mortgage payment. "It was scary," says Levine.

Everyone who is in the market for a home loan is jumpy these days. Not only have rates risen sharply from midyear record lows, but they have never been more volatile. Since mid-July, the average rate on a 30-year fixed mortgage has fluctuated as much as .25% a day at least 10 times, according to the Mortgage Market Guide. That's not normal; over the two years before mid-July, rates bounced that much in a day only once.

The best way for home buyers and refinancers to cushion themselves against rate shock during closing is by signing, as Levine did, an agreement with lenders that guarantees a specific rate for 30, 45 or 60 days. Yet in this mercurial environment, borrowers who want to lock in still may find themselves locked out. Lenders stop accepting lock-in guarantees while they are changing rates. And lately mortgage companies that typically update rates once a day have been adjusting them several times daily. "You quote people a rate, and by the time you can lock it in, it's expired," says broker James Fresella of Apollo Financial Services in Riverdale, N.J. "That's the trauma people have to face."

There's another pitfall: a lock-in can be canceled if the loan processing isn't completed by the time the agreement expires. Unanticipated delays can crop up in a number of ways. For example, applicants may be slow to produce all required documents. "If you have bad credit or bad records, it's not the bank's fault," says Fresella. Sometimes, though, it is the bank's fault. Lenders bogged down with application backlogs may not be able to process paperwork quickly. Under those circumstances, lenders may offer to extend the deadline as long as 30 days. In some cases, for an additional fee, banks may even approve an extension.

To avoid unpleasant surprises, know when your lock-in agreement expires, and keep close tabs on your application during processing. Levine was lucky: frequent calls to her loan officer eventually helped her close on the refinancing on time at the 5% rate. "You really have to fight hard to make sure your loan is refinanced or processed in time," says Levine. Eternal vigilance may be the price of a low mortgage rate.

Sharon Epperson is a correspondent at CNBC