Changing the Loan After You Lock
July 7, 2003, Revised September 21, 2003, July 16, 2009
"I locked a 30-year fixed-rate mortgage at 5.625%. At the time, I could have had the 15-year version at 5%, but I was afraid of the larger payment. A week later, when the rates had fallen to 5.5% and 4.875%, I decided I wanted the 15, but the rate they offered me was the original rate of 5%. Is that fair?"
It’s more than fair, since the lender charged you nothing for the cost and bother of changing the deal. Some other lenders faced with the same situation would have asked for 5.125% or 5.25%. Changing the loan term gives you no claim at all to the new lower market rate.
When a loan is locked, the lender is committed to the terms of the deal if market rates go up, and expects the borrower to be committed if rates decline. Some borrowers behave as if only the lender is committed, by jumping to a new lender when market rates decline, and starting the process again. Lenders can’t prevent this "lock-jumping", but they can and do refuse to accept requests to drop the rate from borrowers who have locked. This holds whether the borrower wants to change the loan or not. If the borrower jumps, so be it.
Most lenders follow these rules in dealing with a borrower who has locked but wants to change the loan type.
1. If the market rate is lower at the time of the change than it was at the lock, the change will be made at the prices prevailing at the time of the lock. The borrower will not get the benefit of the decline in market rates.
2. If the market rate is higher at the time of the change than it was at the lock, the change will be made at the new higher prices. The borrower will lose the benefit of having locked when rates were lower.
The moral: make sure you know exactly what you want before you lock.
"I locked a 30-year fixed-rate mortgage at 5.625%. At the time, I could have had the 15-year version at 5%, but I was afraid of the larger payment. A week later, when the rates had fallen to 5.5% and 4.875%, I decided I wanted the 15, but the rate they offered me was the original rate of 5%. Is that fair?"
It’s more than fair, since the lender charged you nothing for the cost and bother of changing the deal. Some other lenders faced with the same situation would have asked for 5.125% or 5.25%. Changing the loan term gives you no claim at all to the new lower market rate.
When a loan is locked, the lender is committed to the terms of the deal if market rates go up, and expects the borrower to be committed if rates decline. Some borrowers behave as if only the lender is committed, by jumping to a new lender when market rates decline, and starting the process again. Lenders can’t prevent this "lock-jumping", but they can and do refuse to accept requests to drop the rate from borrowers who have locked. This holds whether the borrower wants to change the loan or not. If the borrower jumps, so be it.
Most lenders follow these rules in dealing with a borrower who has locked but wants to change the loan type.
1. If the market rate is lower at the time of the change than it was at the lock, the change will be made at the prices prevailing at the time of the lock. The borrower will not get the benefit of the decline in market rates.
2. If the market rate is higher at the time of the change than it was at the lock, the change will be made at the new higher prices. The borrower will lose the benefit of having locked when rates were lower.
The moral: make sure you know exactly what you want before you lock.