Predicting the rise or fall of interest rates is impossible, and clearly beyond the scope of this article. Consider the famous quote by Peter Lynch (an investor that financial journalists refer to as “legendary”):
“Nobody can predict interest rates, the future direction of the economy, or the stock market.”
What we are here to discuss is how the rate lock decision impacts the real estate transaction, and vice versa. Often, the client’s decision decision of locking a rate occurs in the vacuum of the client-banker relationship without regard to the overall process that is being guided by the attorney in the purchase.
Bankers and clients are understandably focused on securing the lowest possible rate. Sometimes, a client will select one lender over another simply because of a 1/8 point difference in the quoted interest rate (choosing a banker with NY Cooperative and Condominium experience is another essential factor to consider). In a market of rising rates, the pressure on clients can be even greater, especially when a banker is prompting the client to act quickly in order to move the loan process forward.
From the perspective of the purchaser’s attorney, if a rate is locked too early in the transaction, it can cause complications in the timing of the transaction and may subject the buyer to substantial added bank fees. The specific costs involved can range from lender to lender, from a nominal fixed fee for a small extension to a more significant fee, such as a percentage of the loan amount. In some drastic cases, the buyer may be subject to losing a previously granted loan commitment entirely.
Locking a rate implies an amount of control in the timing of the transaction that may not actually exist. A buyer may want to close quickly to meet their rate lock deadline precisely at the very time a seller wants to slow things down, perhaps to secure their housing after the sale of the property. The situation can become even more complicated when one considers a Cooperative purchase, where the timing and concerns of a Board of Managers or a Transfer Agent must also be factored into the equation, or New Construction where a developer may be behind schedule in setting Closing dates due to construction delays or other issues.
Many variables can affect the timing of a Cooperative purchase, such as the date the board package is submitted and ultimately reviewed by the board, the interview date, and the date the board renders a decision on the application. This is all prior to considering the competing schedules of the buyer, the seller, the buyer’s attorney, the seller’s attorney, the bank, the bank attorney, and the managing agent or transfer agent.
The client will ultimately need to balance the costs associated with an early rate lock with the risk of rising or falling rates, and the uncertainty of the timing of the ultimate closing date. The strategy implemented is often unique to each transaction and we can offer guidance based on our experience in this area.