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Think before you blow the lock on that mortgage rate

Before you walk from the lock You've locked yourself into a good mortgage interest rate for 30 days and you're happy. You expect to close a month from now on the house you want at a payment you can afford. Suddenly, interest rates start to drop and the rate you've locked in doesn't look quite so good.

Why did you lock in the rate in the first place? Because a rate lock is a form of insurance to keep the interest rate from escalating to the point where monthly payments on your proposed loan become unaffordable. The only time such locks become an issue for cost-conscious consumers is when rates are dropping and each fraction of a percent represents a savings over the locked rate.

For example, take a $125,000 30-year fixed-rate loan. The monthly payment at 7 percent interest works out to $831.63. At 6.9 percent, it goes down $8.38, to $823.25. Over the course of the loan, that represents an extra $3,016.80 in your pocket.

It's a scenario that many mortgage consumers have faced in recent months, and although mortgage rates have stopped plummeting for the moment, more drops are possible.

Pause before you break
If you're tempted to break a rate lock and head for another lender, experts warn that you should tread carefully and consider the time and expense that breaking the lock can incur.

"Breaking rate locks is easy to do," says Ron Rosenblatt, vice president of retail operations of Des Moines, Iowa-based Principal Residential Mortgage Inc. "One simply walks away and does not close the loan. However, there could be expensive repercussions to that action.

"The costs involved in chasing a lower interest rate ... could be numerous," he says, "from a forfeited application fee to the loss of nonrefundable fees paid up front, to being billed for expenses incurred by the lender, to a variety of expenses to be reimbursed the seller, the real estate company, or both, as well as other vendors involved in the transaction, to being sued by a lender or other party to the transaction."

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Generally, lenders don't charge upfront fees to lock in rates for up to 45 days. That's because the consumer pays for the lock in interest points, says Victor Benoun, author of "Your Castle, No Hassle" and president of Mortgage Source Inc. in Studio City, Calif.

"When you're locking in a rate," he says, "lenders have to secure funds today for some future date, so the longer they are securing those funds at that rate, the more it's going to cost the consumer. Let's take today (March 29), 6 7/8 (percent) on a 30-year fixed would cost one point to the consumer for a 15-day lock. A 30-day lock might cost 1 1/4 points, a 45-day lock might cost 1 1/2 to 1 3/4 points."

To lock in for longer periods a consumer would likely pay a nonrefundable fee that would be forfeited if the consumer broke the lock, says Gilda Iriarte, a loan officer with Access National Mortgage in Miami.

The lack of upfront fees in the short-term locks seems to make walking away from a rate lock a painless exercise, but she says you should think again.

Be sure you'll benefit
There are other factors to consider, not the least of which is whether you will pay more in the short term than you'll save over the long haul. Few home buyers will own a house for 30 years. If you own a home for seven years, the $8.38 a month reduction in our example above amounts to only $703.92, which could easily be eaten up in time and fees to break the lock.

When purchasing a home, there's also the strong possibility that walking away from a lock can keep you from closing on time and thus may blow the whole deal.

"What holds things up is getting verifications again," Iriarte says. "You have to do verifications to the new lender. You have to redo the appraisal to the new lender. There are a number of administrative things that take time. So you're looking at maybe at least 15 days to redo everything."

Besides the cost in time, you may also have to pay new fees to get things like an appraisal redone, she says.

Is there any chance that a lender you've locked in with will agree to come down to a prevailing lower interest rate before closing?

"Normally I do a 30-day lock and if rates go down during that period, I don't have any choice, I have to go to another lender if my client says, 'I don't want to close at that rate,'" Iriarte says. "I can't take it back to that lender and say, 'Hey! Guess what? Rates went down, and my client wants the lower rate.' It ain't going to happen."

If you have good credit, you shouldn't have a problem getting a loan from another lender approved at the lower interest rate, but you take the risk of being turned down by a second lender if you have any special needs, she says.

Refinance rate locks
The least-risk scenario for breaking a rate lock is in a refinancing deal where there is no time constraint on the consumer seeking the loan.

"In a refinance, the borrower can just wait to see what happens," says Jack Guttentag, a syndicated columnist who founded the Mortgage Professor Web site. "If rates go down, he can threaten to walk away from the deal unless his rate is reduced ... I don't like to be in the position of teaching borrowers how to take advantage of mortgage brokers any more than I like to see mortgage brokers take advantage of borrowers.

"If a lot of borrowers start to do that, what you're going to see is a rise in rates on refinance transactions relative to rates on purchase transactions. I think this may already have happened. I was rooting around the other day and I found a consistent tendency for refinance transactions to be priced almost a quarter of a percent higher than purchase transactions."

For protection on both ends of the scale, some lenders have "float-down" provisions, he says. In these contracts, the consumer locks in a rate, and if rates come down, the consumer has the opportunity to lock in a new lower rate once before closing. But, he notes, "They're priced a little higher because the lender's taking that risk."

In the end, chasing anything but a significant drop in interest rates, something which likely won't happen in the normal 30 to 45 days it takes to close a loan, is futile because of what consumers pay for changing their minds, experts agree.

"I get people calling me saying, 'Well, let's go ahead and start the paperwork. Then, when we reach the low point we'll lock it in,'" Benoun says. "I've done this for 22 years and I don't know where the low point is ... so people need to have realistic expectations. Otherwise, they are just filling out paperwork for no good reason."

-- Posted: April 5, 2001
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National Mortgage Rates
OVERNIGHT AVERAGES
Rates may include points.
30 yr fixed mtg 4.32%
15 yr fixed mtg 3.29%
5/1 jumbo ARM 3.60%



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