Should a Required Lock Deposit Torpedo the Deal?
March 7, 2005
Borrowers lock the price to protect themselves against the risk that market interest rates jump between the lock date and the closing date. The lock protects the borrower against this risk, but it is costly to the lender. Lenders don't mind incurring the cost if they get the loan, but they don't appreciate borrowers who impose this cost on them and then go elsewhere for their loan. The lock deposit is a reasonable attempt to discourage borrowers from doing this.
"I recently applied to refinance into a 30-year FRM. The lender is prepared to lock at 5% and zero points plus $2400 in other lender fees, which I have accepted. However, the lender also wants a lock deposit of $1295, which is refundable at closing but not refundable if I exercise my right to rescind. Should I accept this additional condition?"
If this was a good deal without the condition, it remains a good deal with it. Other things the same, I would prefer to deal with a lender who required a lock deposit than one who didn’t. The lender who charges a lock fee is more likely to honor the lock than the lender who did not.
Because locking imposes a cost on the lender, those who don’t charge to lock because it frightens borrowers like you away have to cover that cost in some other way. If their locks only cover rates and points, which is typical, they may discover new fixed-dollar fees on the way to closing. Or they may lock with their fingers crossed behind their backs. If the worst happens, they weasel out of it.
However, I think the lender who told you that the lock deposit would be lost if you exercised the right to rescind your refinance was blowing smoke. You will lose the deposit if you walk away before closing. But in the event you close and give notice of intent to rescind within the required 3-day notice period, the law says "…the creditor shall return any money or property that has been given to anyone in connection with the transaction…"
I am not a lawyer, but to me, this says that if you close and rescind, you get back your lock deposit along with any other payments made to the lender.
Rationale of a Required Lock Deposit
Borrowers lock the price to protect themselves against the risk that market interest rates jump between the lock date and the closing date. The lock protects the borrower against this risk, but it is costly to the lender. Lenders don't mind incurring the cost if they get the loan, but they don't appreciate borrowers who impose this cost on them and then go elsewhere for their loan. The lock deposit is a reasonable attempt to discourage borrowers from doing this.
"I recently applied to refinance into a 30-year FRM. The lender is prepared to lock at 5% and zero points plus $2400 in other lender fees, which I have accepted. However, the lender also wants a lock deposit of $1295, which is refundable at closing but not refundable if I exercise my right to rescind. Should I accept this additional condition?"
If this was a good deal without the condition, it remains a good deal with it. Other things the same, I would prefer to deal with a lender who required a lock deposit than one who didn’t. The lender who charges a lock fee is more likely to honor the lock than the lender who did not.
Because locking imposes a cost on the lender, those who don’t charge to lock because it frightens borrowers like you away have to cover that cost in some other way. If their locks only cover rates and points, which is typical, they may discover new fixed-dollar fees on the way to closing. Or they may lock with their fingers crossed behind their backs. If the worst happens, they weasel out of it.
Does Rescission Make the Lock Deposit Refundable?
However, I think the lender who told you that the lock deposit would be lost if you exercised the right to rescind your refinance was blowing smoke. You will lose the deposit if you walk away before closing. But in the event you close and give notice of intent to rescind within the required 3-day notice period, the law says "…the creditor shall return any money or property that has been given to anyone in connection with the transaction…"
I am not a lawyer, but to me, this says that if you close and rescind, you get back your lock deposit along with any other payments made to the lender.