Does locking a rate commit you to a lender?
The urge to switch mortgage lenders is not uncommon among mortgage borrowers.
This sometimes happens because borrowers are rarely in the mortgage marketplace, and real estate financing can be complex.
Everybody wants to get the best rates and terms — with good reason. Even small changes in mortgage rates can have big financial consequences over the life of a loan.
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Can you switch mortgage lenders after a rate lock?
A rate lock agreement with your mortgage broker or lender guarantees you’ll be able to borrow at a specific interest rate, provided your home loan or refinance loan closes before the expiration date of the rate lock period.
There are grounds to back out of the mortgage underwriting process, but canceling because current mortgage rates are lower now than when you signed your agreement isn’t typically one of them.
Nonetheless, that doesn’t mean you’re stuck with a higher rate. You can still take advantage of market rate fluctuations. But depending on your lender’s rate lock policy, backing out may mean beginning the loan approval process all over again with a new lender.
Here’s how to decide if backing out of your rate lock agreement is right for your situation and personal finances.
What’s the point of a mortgage rate lock in?
Rate lock-in agreements give lenders, homeowners, and homebuyers peace of mind during the loan underwriting process.
Lenders and brokers use rate lock-ins to help them approximate how much trade they’ll do in the upcoming months. While homebuyers and homeowners can rest assured that they’re secure against mortgage rate increases before their loan closes.
Why switch lenders after a rate lock-in
Rate locks are a big reason that borrowers choose to switch lenders.
Imagine that you lock in a 30-year fixed-rate mortgage at a 4.5% rate for 30 days. And then a week later, the market rate drops to 4.25%. Can you take the lower interest rate, or are you stuck?
Even if you go past the agreed expiration date, and don’t close within the 30-day rate lock period, most lenders won’t give you the lower rate at closing. You’ll get either the rate you locked, 4.5%, or a higher rate if interest rates rise before your loan closes.
One way to avoid this is by choosing a float-down option that lets you close at a lower rate if interest rates fall while you’re locked.
Float down option
A float down option is a provision extended by your loan officer that will allow you to drop your locked-in rate to the current mortgage rate before your closing date.
While most lenders won’t charge you a lock fee, there is an additional fee for a float down option, but it’s often added to your closing costs.
It’s not always about lower mortgage rates
Of course, money is not the only issue. An unresponsive loan officer or lost paperwork can cause borrower dissatisfaction — and an urge to look around.
Know that you’re free to switch lenders at any time during the process; you’re not committed to a lender until you’ve actually signed the closing papers.
But if you do decide to switch, re-starting paperwork and underwriting could cause delays in your home purchase or refinance process. This is a bigger risk if you’re under contract to purchase a home before a set closing date.
Look before you lock in
Another reason for borrower uncertainty concerns the rate shopping process. In many cases, borrowers do not shop around when buying or refinancing. They wonder: could I do better? And halfway through the loan process, they realize that they can, and they start over with another lender.
According to the Consumer Financial Protection Bureau (CFBP), studies have found that “more than 30% of borrowers reported not comparison shopping for their mortgage, and more than 75% of borrowers reported applying for a home loan with only one lender.
“Previous Bureau research suggests that failing to comparison shop for a mortgage costs the average home buyer approximately $300 per year and many thousands of dollars over the life of the loan.”
So, avoid jumping ship to get a better rate. Pick the best ship before you submit a mortgage application.
When to back out of a mortgage rate lock agreement
If mortgage rates fall significantly after you lock in your mortgage loan, it may be worth starting over with a new lender to get the lower interest rate. But that depends on the size of your loan amount and the difference in interest rates.
If a new appraisal costs $800, for instance, it won’t make much sense to switch lenders to save $5 a month on your mortgage payment. But if lower rates mean you would save $300 on your monthly payment, that’s different.
Under some circumstances, your loan officer may work with you even without a float down option.
“If rates drop significantly after you are locked and remain at the lower level when you are at the closing stages, you may be able to get an adjustment with the lender you are working with,” says Jon Meyer, The Mortgage Reports loan expert and licensed MLO.
If this happens and your current lender is unwilling to negotiate a lower rate with you, it might make sense to back out of your rate lock agreement, despite the additional fees to switch lenders.
Risks of backing out of your mortgage rate lock
Probably the most concerning problem associated with switching lenders has nothing to do with mortgage rates or closing costs.
Closing date obligations
In a typical home purchase or refinance situation, closing must take place on or before your closing date. It’s the buyer’s obligation to obtain loan underwriting in a specific period of time.
Switching lenders means the entire mortgage application process begins anew, and you must quickly get loan approval with a new lender and supply all required information and documents before your closing date.
There are no stone tablets which say the second lender will be any better than the first. It’s still possible for paperwork to be lost. There can be delays.
For instance, HUD gives FHA lenders five days to transfer appraisals. That may be quicker than a fresh appraisal, but there may not be many days before the home loan or refinance loan closes.
If switching lenders delays closing, a number of serious problems can develop. Other troubles can arise for homebuyers with low credit, a bank statement loan, a down payment gift letter or other special considerations that make loan approval more challenging.
If changing lenders seems attractive, especially in a home purchase situation, speak with your mortgage broker or loan officer about their rate lock policy before switching lenders. The act of switching, by itself, may represent costs and risks that are potentially much bigger than expected.
You may lose your earnest money
Backing out of your rate lock-in agreement and cancelling the mortgage loan may likely mean forfeiting your earnest money. The seller has the legal right to keep earnest money if you fail to hit your closing date.
Credit report fees
Financing rules generally prohibit lenders from charging upfront fees until you have received the Loan Estimate form and told the lender you want to proceed with the loan application.
The exception to the rule is that the lender can charge a fee to pull your credit report to verify your credit score. This is generally a minor amount.
Many lenders charge some form of loan application fee. The amount charged varies widely. Whatever it is, once paid it typically will not be returned if you switch to a different lender.
Appraisals are not generally portable; that is, one appraisal can typically only be used by one lender. Get another lender, and you’ll likely need another appraisal. That means two appraisal fees. The exception is that under the FHA program, appraisals are required to be portable.
“In cases where a Borrower has switched Mortgagees,” says HUD, “the first Mortgagee must, at the Borrower’s request, transfer the appraisal to the second Mortgagee within five business days.”
Compare mortgage rates before a purchase or refinance
Borrowers sometimes wonder if they should switch lenders at all. The answer is generally yes, but the bigger question is whether a change makes sense.
The mortgage process requires lenders to provide each homebuyer with a Loan Estimate. This is a standardized three-page form which outlines the key loan terms and provisions of the mortgage loan.
The lender must send out the Loan Estimate within three business days of receiving your application.
The Loan Estimate shows the lender’s offer, but the borrower is not required to accept those loan terms or use that lender. You can continue to shop around for more favorable home purchase or refinance rates.
Should you lock in a rate?
Whether you’re a homebuyer or refinancing your existing loan, current mortgage interest rates are still historically low.
So regardless if you opt to lock-in a rate on a new loan or choose a lender with a float down option, shop your refinance or home purchase loan around to get the best deal on your loan.