Ask The Expert

Rates have been rising all year. I have been advising people to lock as soon as possible. My manager says that sometimes I may be putting my clients at risk by doing that. How can that be? Bob from New Jersey

That is a very good and timely question. We all know about the risk of floating. Rates may go up. But what are the risks of locking? I see two such risks...

First, many loan officers advise their clients to lock in more quickly than they should. This adds a risk that the lock will expire because the loan will not close on time. There is more risk of rate movement 60 days from now than there is seven days from now. That is why 60-day locks are more expensive than 30-day locks. If you lock in now and the lock expires in 60 days--the markets could have moved precipitously. If you wait one week--the risk of substantial movement is lessened. This does not mean that the situation will always work in your client's favor--but we are talking about percentages of risk. There are a ton of scenarios outside of a loan officer's control that could delay a closing.

The second risk is more obvious. If your client locks in a rate and then rates fall precipitously, either the client pays a higher rate, or you may lose the loan because they walk. When rates are rising, they don't always go up in a straight line and trying to time the markets is very risky. The client must be educated as to what it means to lock in a loan and what risk they are undertaking whether they lock or float. The better they are educated, the fewer problems you will have with regard to changes in the markets.

Dave Hershman has been the leading author and a top speaker for the industry for decades with six books authored and hundreds of articles published. His website is www.originationpro.com. If you have a reaction to this commentary or another question you would like answered in this column? Email directly at [email protected].