It is sound, as far as it goes, but it doesn't go far enough. What your logic overlooks is that the "float price" that will be quoted to you prior to closing 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 float price prevailing at the time your loan closes, without having enjoyed any protection.
To illustrate, the mortgage broker in the table below has 5 sets of wholesale prices from 5 lenders for lock periods of different length. Lender A has the best "float" price, which is the price for same-day delivery. Lender B has the best price for delivery within 30 days, meaning that B will hold the prices ("lock them") for 30 days. Similarly, C has the best price for 60 days and D for 90 days. The mortgage brokers' prices, which are italicized and underlined, are the lowest of the wholesale prices quoted by the 4 lenders for each lock period, plus a markup of 1.5 points.
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Lenders' Prices, and the Mortgage Broker's Prices, on a 6.50% 30-Year Mortgage
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Lock Period
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Broker's Prices*
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Lender A's Prices
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Lender B's Prices
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Lender C's Prices
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Lender D's Prices
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"Float"
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3.5 Points
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2.0 Points
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2.50 Points
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2.75 Points
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2.50 Points
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30 Days
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4.00
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2.60
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2.50
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2.75
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2.75
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60 Days
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4.25
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2.90
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3.00
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2.75
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3.00
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90 Days
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4.75
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3.75
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4.50
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4.50
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3.25
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The deal you selected was the float at 3.5 points, based on lender A's float price, rather than the 90-day lock at 4.75 points, based on D's 90-day quote. The broker quoted the best deals available for each lock period because the broker knew you were comparison shopping and had many options.
Now lets flash-forward 85 days and assume that the market has not changed one iota. The mortgage broker has access to the wholesale prices shown in the table, and you are preparing for your closing. What price will you pay? You should pay 3.5 points, and many mortgage brokers in this situation will charge you 3.5 points, but many others will succumb to the temptation to try and charge you more. For while the market has not changed, your situation has changed 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 mortgage broker who took you.
The float arrangement does not specify how changes in the "market rate" are to be determined. When the time comes to lock the rate, for all practical purposes the "market rate" is whatever the lender or broker says it is. For example, there is nothing to prevent the broker fishing for new customers from quoting a float rate of 3.5 points based on Lender A's quote, and quoting 4.25 points based on Lender D's quote after the fish is hooked. Of course, the loan would be delivered to A and the broker would make an extra ¾ of a point.
Borrowers who are refinancing can monitor the float price quoted to them by the broker against other market information, and if the quote appears out of line they can bail out. Home purchasers with a scheduled closing, however, inevitably reach a point of no return where it is too late to begin the process anew. During a refinance boom, when loan processing takes longer, the point of no return might be 45 days rather than the 30 days that might suffice in a more normal market.
To protect themselves, I recommend that borrowers not float past the point where they can bail out and shop elsewhere. Alternatively, they should pin down the lender or broker on an objective procedure for determining the market rate. One simple and fair rule is that the market rate will be the rate that the lender is quoting to potential new customers on the same day. If you lock only a few days before closing, your rate should be the lender's current float rate. If you lock 15 days before closing, your rate should be the lender's 15-day lock rate on that day. And so on.
One advantage of dealing with a lender or broker who quotes prices on the internet is that they provide you with the data you need to monitor the rate they give you when you lock.
