As home buyers reenter the market accompanied by periodic interest rate reductions, deciding when to lock-in a rate will become increasingly difficult. While the desire is to acquire the lowest rate possible, interest rate volatility makes it impossible to know what will occur day to day.
An Example: Let’s use the following scenario to demonstrate a likely situation going forward. Upon signing a purchase agreement with a 45-day estimated close of escrow date, the interest rate is at 6.875%. The buyer chooses to protect oneself from any rate increase and locks the rate. Twenty days later the rate declines to 6.625% and ten days later it declines again to 6.5%.
Initial Disappointment: A borrower who originally accepted the higher rate understandably questions whether the lower rate is somehow available, but is reminded that a reduction is not possible. The homebuyer is understandably disappointed and maybe just a wee bit angry.
Understanding the Lenders’ Reluctance to Adjust the Rate: It can be a little confusing but when a lock-in occurs the lender “guarantees” delivering to the market the loan at the specific locked-in rate as long as the loan closes within the specified lock period. In other words, if the rate is adjusted, especially downward, the lender is penalized via what can be a substantial fee for said change. Hence the name “lock- in” which the borrower is protected against rate increases but loses the ability to take advantage of any subsequent rate reductions.
Are There Any Alternatives: Understanding this conundrum does not necessarily alleviate the disappointment. So, are there any solutions?
- Floatdown: Although everyone would prefer a situation wherein the lock-in rate automatically reduces as the overall rates decline, this idea of such a “float down” is generally not available.
- Let the Lock Period Expire: As rates decline and the original lock-in date nears, why not merely let the original lock expire and re-lock at the lower rate? Lenders would not escape their penalty fee in an immediate re-lock situation Thus, the rule is that one cannot lock at a lower rate until a 30 day period has elapsed from the original lock’s expiration date. The risk of waiting plus the additional time interrupting the anticipated closing date usually negate this option.
- Switch to Another Lender: Again, time becomes a major factor plus the typical expense of obtaining a new appraisal (and the hefty fee required) usually makes this option unappealing.
- Can Your Local Mortgage Provider Help: Although unlikely, your local mortgage broker can TRY to negotiate what is called a “blended rate” wherein the lender agrees to a rate between the original higher rate and the current lower rate. Any chance of this occurring usually requires a substantial difference between original and current rates. We must emphasize that while your local lender will make every effort to provide some relief, there is no guarantee that this option will work, especially if the rate differential is a three-eighths of a percent or less.
When to Lock-In an Interest Rate: Every decision is a risk. As a borrower, does one risk an upward turn in rates or risk disappointment if rates decline during the loan process? A very difficult decision!