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Frugal Homeowner®



How to Avoid Lock Problems in a Precarious Market

QUESTION: We’re refinancing our mortgage and the lender asked if we want to lock-in the mortgage rate.  While I hate paying an extra $300 to do so, qualifying will be tight if the rate increases.  Also, what questions should we ask the lender about the rate lock process?---PK

ANSWER:  Sounds like you’ve just answered the first part of your own question!  Three-hundred dollars is a small price to pay to lock-in the interest rate in order to qualify.  But there are several questions you need to ask upfront before doing so. These are especially crucial post-mortgage meltdown since loans are taking longer to process and reach application approval. The major key to a successful rate lock is to know the lender’s rules and procedures beforehand. 

Locking means that the lender commits that the price at closing will be the lock price, even if the market price is higher at closing than it was on the lock date. The price commitment holds for a specified period, usually 30 to 90 days, with longer periods priced higher. 

Before a price can be locked, most lenders will require that a purchaser have a bilaterally accepted contract of sale, and that the loan application has been approved.  So what happens if the market price rises before the loan rate can be locked?  The lender will be able to lock at the new higher price.  Often seen by consumers as a frustrating “bait and switch”, it’s really just price volatility in the marketplace, something the lender can’t control.         

If the market price drops before the loan can be approved and locked, the lender should be willing to lock at the lower price.  This is a critical question to ask upfront since not all lenders honor the lower price. 

Another crucial question is what rates and fees are covered by the lock-in?  Many lenders only lock the interest rate and points.  But some extend past those to include all other lender fees, avoiding the possibility of fee escalation after the lock.  Although fairly rare, you can even find lenders who are willing to extend the lock to cover third-party fees. 

Clarify with your lender how the $300 fee will be applied.  The customary approach is to apply it to your settlement costs, which means that you’ll lose the fee if you walk away from the lender.  Since refund policies vary widely, ask the lender if the fee would be refunded should you not be approved for the mortgage.

If you want to take advantage of any market price drops after the loan is locked, ask if your lender offers a “float-down” provision.  This allows for a drop in rate, but perhaps not all the way down to the new market rate.  This may cost a bit more, but could be good insurance since you’re only marginally qualified at the rate quoted. 

With mortgage loans taking longer to process and close, the lock period should be extended at no cost if the delay is the lender’s fault.  But should you be the source of the delay by not providing documentation in a timely manner, etc., you’ll be the one to suffer the penalty.  A good lender will minimize this source of possible conflict by spelling out the borrower’s obligation in detail in the written lock agreement.


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