Q: Three months ago, I started the process to buy a home. The lender advised me lock my interest rate. It was at 3.9 percent. Now the owner has taken a long time to fix problems and the lender says I owe a $400 fine because I locked into that rate and need an extension. But interest rates have gone down since then and this isn’t my fault that the owner is taking too long. How do I get out of paying the penalty?
A: If interest rates had gone up, you might gladly be willing to pay the $400 to extend your interest rate for a longer period. We frequently receive letters from our readers that complain that they need to pay a fee to extend a rate lock when rates have gone down, but they don’t complain when rates go up.
While that may seem obvious, when we give people their options, we frequently get letters back from mortgage brokers and lenders giving us some of the story behind the rise or fall of interest rates and the work they put into their clients’ files.
When you applied for your loan, you submitted paperwork for your lender to review. You also may have paid a fee to cover the appraisal of the home you are buying and for your lender to obtain a credit report on you. With some or all of that information, the lender proceeds to review the file and spend time working on getting things ready for your home purchase. The mortgage broker or lender will tell you that they have spent a considerable amount of time on your file and have worked with the end lender, processors and underwriters in getting the loan ready for your closing.
All of that is true. One additional piece of information that most borrowers forget is that if you want to lock your interest rate today, your lender will have to find an investor willing to fund that loan at the interest rate you want. When your mortgage broker or lender locks your rate in, the lender is making a commitment with that lender to provide you with a loan at that rate and for that end lender to buy that specific loan at a specific price. That price ultimately affects what the mortgage lender or broker is paid for obtaining a loan for you.
You may view the $400 as a penalty, but usually it truly is a fee that places the mortgage lender or broker and the end lender at a similar place as if the loan had closed on time. We have seen situations where it seems that the rate lock extension appears to be arbitrary and expensive, but other times it appears to be a reasonable fee given the time requested by the prospective homebuyer to get the deal closed.
From your vantage point, it does seem unreasonable that your lender would want to charge you a fee to extend your rate lock when interest rates have gone down. However, you should know that your loan will be treated like a security. If interest rates go up, the value goes down. If interest rates go down, the value goes up. If you had closed on your loan at the original interest rate, the institution receiving your loan would make money on your loan as interest rates fell.
Having said all that, most loan documents do not bind you to close with a specific mortgage lender or mortgage broker. You could start the process over and find a different lender to close your loan. But you’ll end up paying more in fees and costs and if you restart the process, you might not have a loan in place in time when the seller finally does what he needs to do to sell you the home.
A better solution for you is to have your attorney in the real estate transaction work to get the seller to pay the fee if the seller was at fault for the delays. You should also know, that you may be able to refinance your loan shortly after closing to lock in a lower interest rate, but you will have to take into account fees and costs to refinance along with the time and effort it takes these days to get a lender to get a loan closed.