July 22, 2002, Reviewed September 22, 2010, January 22, 2011
When I retrieved my email today (July 12, 2002), I found three items that provoked this column. One was from bankrate.com announcing the results of their weekly mortgage interest rate survey.
"Fixed mortgage rates fell for the sixth straight week in the Bankrate.com national survey of large lenders, reaching a new low point for the year…"
A second and closely related item came from a mortgage broker bulletin board, where brokers go to exchange views and information with other brokers.
"Had a refi set to close yesterday, which had been locked at the end of June at 6.5%. The borrower, who follows the stock and bond market, called me up 3 hours before closing and said rates had dropped and he wants a rate of 6.375% or he walks. I reminded him that the lock works both ways, but I would check with the wholesale lender. The lender said I could have 6.375% but it would cost me $773 in lost commission. I told the lender that if I don't go to 6.375%, the borrower would walk, whereupon the lender reminded me that if I cancelled a locked loan that had been underwritten, I would incur a penalty of $1085. I was backed into a corner and had no choice but to go ahead and eat the lost commission. How is a broker supposed to protect himself against this?"
This incident reminded me that on several occasions I have criticized "lock jumping" borrowers, such as the one described by this broker. In one column, I even went so far as to compare them to shoplifters. By coincidence, the third item I received in today’s mail took issue with my position on lock-jumping.
"Why would a "lock-jumper" be considered a shoplifter? It seems to me that most lenders and brokers don't tell the borrower that a lock is binding on them if rates go down, and generally the borrower doesn’t sign anything indicating such a commitment. If they had wanted a commitment, they should have asked for one.You can’t hold the borrower to a commitment that they never actually make. My perception is that the lender or broker is offering to lock the rate at the lender's risk to get the borrower's business. The cost of lock-jumping is just another cost of doing business."
This reader makes a very good point. The prevailing practice of brokers and lenders is to leave the borrower’s commitment under a rate lock unstated. They do this for the same reason that they do not charge a lock fee that the borrower would lose if he walked from a lock. Brokers and lenders fear that if they charge a lock fee, or ask the borrower for a written acknowledgement of their commitment under the lock, the borrower would be frightened into the arms of another loan provider who required neither.
I have changed my position on this issue. My preaching to borrowers about their obligation under a lock was misguided. What matters is not what I say but what the broker and lender say – or don’t say. If a broker or lender allows ambiguity regarding the borrower’s commitment under a rate lock, then the borrower is entitled to interpret that ambiguity as she pleases. Lock-jumping is OK, in other words, unless the borrower acknowledges in writing that it is not OK.
Ambiguity in the process creates inequities and raises costs. Brokers could remove ambiguity by offering borrowers a clear set of choices and conditions, in writing, something like the following:
Option 1: A 45-day lock at 6.25% and 1 point. If you accept the lock, you and the lender are both committed, regardless of changes in interest rates in the period until closing.
Option 2: A 45-day float-down at 6.25% and 1.5 points. If you accept the float-down, the rate can’t go up with a rise in market rates, but it can go down if the market rate declines. You are allowed one rate reduction within the week prior to closing. The new market rate at that time will be taken from the locking lender’s price sheet.
Required Fee: The fee for a lock or float-down is 1% of the loan paid on the lock day. The fee will be credited to you at closing, or returned if you are not approved for the loan. However, if you are approved and you don’t close, you lose it.
FAQs
If you accept the lock, you and the lender are both committed, regardless of changes in interest rates in the period until closing.
Does locking in a mortgage rate commit you to a lender? ›
A mortgage rate lock ensures the rate on your mortgage stays the same, from the initial quote to closing. Locking in your rate isn't a binding contract to work with that lender, though. You can still switch lenders if you choose to.
Are you committed if you lock in a rate? ›
Typically, once you've locked in your rate, you're committed to it. However, with Direct Mortgage Loans, there's a chance you could take advantage of our float-down policy. This means that if rates drop, you may be able to get the lower rate.
What is a lock in loan commitment? ›
A lock-in or rate lock on a mortgage loan means that your interest rate won't change between the offer and closing, as long as you close within the specified time frame and there are no changes to your application. Mortgage interest rates can change daily, sometimes hourly.
What does mortgage lock mean? ›
A mortgage rate lock is an agreement between a borrower and a lender that allows the borrower to lock in the interest rate on a mortgage for a specified time period at the prevailing market interest rate. A loan lock provides the borrower with protection against a rise in interest rates during the lock period.
What is the downside of a rate lock to the borrower? ›
Mortgage Rate Lock Cons
You could miss out on a lower interest rate, which could save you thousands of dollars over the life of the loan. If the rate lock expires, you might be charged hundreds of dollars to extend it or miss out on the rate altogether.
Can you back out of a mortgage rate lock? ›
Yes, you can change lenders after locking a rate. But you'll have to start the application process over with your new lender. That means getting pre-approved, submitting all your documents, and waiting for underwriting — twice. All in all, closing a mortgage or refinance usually takes more than a month.
At what point are you committed to a mortgage lender? ›
You are not committed to borrowing from a specific lender until you sign closing documents and receive the funds.
What happens if you lock in a mortgage rate and it goes down? ›
On the other hand, if you lock your rate and interest rates fall, you can't take advantage of the lower rate unless your rate lock includes a float-down option. A float-down option allows you to take advantage of an interest rate decrease during your rate lock period.
Can you negotiate a mortgage rate after locking? ›
Generally, once you've locked in a mortgage rate, the terms are fixed and usually cannot be renegotiated. However, some lenders offer a float down option, allowing you to negotiate mortgage rates if market conditions shift favorably during the rate lock-in period.
A commitment exists once the loan application has been approved, and a loan contract or letter of offer has been issued to the borrower, and the borrower has accepted the offer.
Is a mortgage commitment binding? ›
A mortgage commitment letter may or may not be legally binding on the lender, depending on the wording the lender uses. Conditional commitment letters usually require you to meet additional requirements before you can get a mortgage.
What does it mean for a loan to be committed? ›
Loan commitment occurs after the loan conditions have been met and the lender promises to lend you the specified amount. Preapproval helps a buyer understand what they can afford, and helps a real estate agent properly support them in their search, as well.
Does locking a rate commit you to a lender? ›
If you accept the lock, you and the lender are both committed, regardless of changes in interest rates in the period until closing.
What happens if my mortgage rate lock expires before closing? ›
If your rate lock expires, you must relock it before closing. When relocking, the lender gives you the current market rate or the rate you locked initially, whichever is higher. For example, your initial rate of 6% expired, and rates have since increased to 7%, so your new rate after relocking is 7%.
Should I wait to lock in my mortgage rate? ›
Because mortgage rates have been dropping in anticipation of the recent Fed rate cut, and are likely to continue to drop in 2025, it may make sense to wait. However, if you're risk-averse or unable to wait until the next Fed rate cut, it could make sense to lock in your rate now.
Can a lender not honor a rate lock? ›
A lock failure occurs when a lender does not honor a mortgage price that a borrower had believed was guaranteed. Lock failures occur when interest rates are rising and honoring locks is costly to lenders.
What happens if rates go down after I lock in? ›
On the other hand, if you lock your rate and interest rates fall, you can't take advantage of the lower rate unless your rate lock includes a float-down option. A float-down option allows you to take advantage of an interest rate decrease during your rate lock period.
