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Rates Dropped After I Locked. Now What?

Many economists expect interest rates to rise throughout the year. But even when rates are increasing, there can be windows of opportunity to buy or refinance a home at a good price whenever mortgage rates drop quickly and significantly.

When this happens, borrowers will often choose to start a loan application and lock in an interest rate with their lender. This is a crucial method if rates start to go back up. But sometimes rates may continue to fall after you’ve locked in your rate — and it’s always hard to predict how low rates will go in a particular time period.

It may seem that once you’ve locked in your rate, you’re done negotiating. But you still have some options if rates continue falling. We’ll explore some of those options, as well as strategies for when you should and shouldn’t try to chase after a lower rate after you’re already locked in.

In this article, we will cover:

What is a mortgage interest rate lock?

A mortgage interest rate lock is a lender’s commitment to deliver a specific interest rate and price — giving borrowers certainty about what they’ll pay as they apply for a loan. Usually, a lender will allow you to lock in your rate early in the application process without a fee, with the expectation that the loan will close by the time the lock expires. Rates can generally be locked for a short term of 10-15 days, but some may last as long as 120 days or more.

Rate locks protect borrowers if rates rise during the application period. But there is also some risk. Lenders have no obligation to lower your rate if interest rates fall further after you lock in. Sometimes, however, they’ll be willing to work with you.

How can you get a better rate if you’re already locked?

Mortgage rates are driven by a host of economic factors, just like stocks. Sometimes they go up, and other times they go down.

In the past, rate locks were final. If you wanted to get a lower rate, you had to pack up your paperwork and start over with a new lender. But at the end of the day, lenders don’t make any profit unless they close loans. To keep borrowers from leaving every time their interest rates dropped, lenders created “float down” or renegotiation policies, which allow you to get some of the benefit of falling rates, for a reasonable fee.

Lenders are happy because they close more loans and collect another fee. You are happy because you get a lower rate and don’t have to start your entire loan process over with a new lender.

When it makes sense to seek a lower rate after you’ve locked

Requesting a lower rate after you’ve locked in is not an automatic decision. In many cases, this will significantly set back the timeframe of your loan application. Requesting a lower rate requires new disclosures and an underwriter may need to sign off on the change to make sure the new rate didn’t increase your costs.Here are a few situations where it might make sense to explore a lower rate after you’ve locked in.

You have plenty of time to close

If your closing date is still several weeks away, then it might makes sense to discuss a float down with your loan officer. Signing all the new disclosure paperwork generally takes a few extra days. If you’re planning to close within a week, you risk closing late if you try to renegotiate your rate right before your signing date.

You’re saving at least a quarter percentage point in rate

If you’re saving at least 0.25%, it makes sense to explore a lower rate. At first glance, this tiny percentage change doesn’t seem that significant. The rate on a $200,000 loan dropping from 4.5% to 4.25% only reduces your monthly payment from $1,013.37 to $983.88 — a savings of only $29.49 per month.

While there’s not a huge difference monthly, this still adds up to considerable savings over the life of the loan. Dropping from 4.5% to 4.25% means you’ll spend $10,616 less in interest over 30 years.

When it doesn’t make sense to pursue a lower rate after you’re locked in

There are some circumstances when the costs outweigh the benefits of pursuing a lower rate, and we’ll discuss those next.

You’re just about to close

Purchase contracts have legally binding dates, and if yours is less than a week away, it’s probably best not to rock the boat with any changes to your rate. Even if the rate is improving and your payment is going down, there are a number of people involved in approving these changes, potentially creating delays.

You have a very challenging loan package

If you have bad credit, a lot of debt, or have to get an exception to be approved for your loan, you might not want to add a renegotiated interest rate to the lenders to-do list – especially if you are getting an exception. As mentioned above, there are multiple people involved with your loan process, and all will need to sign off on approving your loan again.

Ways to lower your rate after it’s locked

There are three primary ways you can get a lower rate once it’s locked, and they will all depend on your lender’s policies about relocking or renegotiating your current rate. You’ll also need patience for extra paperwork, and the courage to potentially start the entire loan process over.

Float down or renegotiate the interest rate

One general rule of thumb about loan locks is the longer the lock period, the higher the interest rate will be. In exchange, oftentimes long-term rate lock agreements will include policies that allow the borrower to renegotiate the rate under certain circumstances. In general, these float down policies apply to long-term locks on homes under construction, offering you the benefit of lower rates as you get closer to completion of constructions.

Many lenders have a similar policy for short-term locks as well. It may be called a renegotiation or a float down policy, and it usually has the following requirements:

  • Rates must drop at least 0.25%.
  • You must initiate the float down request by telling your loan officer you want to take the lower rate.
  • The charge for the float down will be a fee of 0.5% of the loan amount or more, paid at your closing. For example, if you are floating down a rate from 4.5% to 4.25% on a $200,000 loan, the charge is $1,000 (0.5% of $200,000).
  • The lock period stays the same. This means you don’t get extra time to close before the lock expires.
  • You generally have to have a fully credit approved loan, meaning an underwriter has reviewed your credit, income and asset documentation. The next step is for you to find a house.
  • There may be restrictions on the types of properties eligible for a float down. There might also be loan amount minimums and maximums to be eligible.

Not all lenders offer float downs or renegotiations, so be sure to ask your lender what their policy is if you start seeing a lot of news about rates falling while your loan is already in process.

Let your lock expire and wait 30 days

If you’re not in a hurry and have a bit of a gambling streak in you, you can let your current lock expire and then wait 30 days before restarting your application.  Although this policy may vary based on lenders, many will allow you to go to “current market” after 30 or 60 days have elapsed since the original lock expired.

There is obviously a lot of risk with this option, and you’ll need to update any paperwork you submitted that may be outdated by the time 30 days is up — including pay stubs and bank statements. But if the interest rate market is on a steady decline, this strategy could pay off.

Switch lenders

You always have the right to cancel your loan application and switch lenders completely. However, this often is not advisable except in cases where you feel like your rate is substantially higher than the current market. Most lenders have some form of a float down option, so it’s rare that you ever need to go down this path.

Keep in mind if you do decide to start over, you are literally going to go back to the beginning. You will need to provide all of your paperwork again to a new lender, including pay stubs, W-2s, bank statements, and you will likely incur the cost of a new credit report. You may also have to get a completely new appraisal if the lender that you started with does not transfer appraisals, which adds to your total closing costs.

Unless the savings is substantial, and you really aren’t satisfied with the service you’re receiving, this should be a last resort option.

What if I haven’t found a property yet?

Interest rate locks are usually tied to a specific property you wish to buy or refinance. This means you usually can’t lock in an interest rate unless you’ve already found the home.

Increasingly, though, there are lenders that offer “lock-and-shop” options — allowing you to lock in a longer-term rate while you’re looking. This lets you take advantage of a low interest rate market without the stress of worrying if rates will suddenly spike and make your payment unaffordable.

Here’s how a lock-and-shop program works:

  • You fill out a loan application and get a full credit approval. This means you provide pay stubs, W-2s and bank statements to support an approval for the loan type and program you are applying for.
  • Once you have the approval, you can select the lock-and-shop option, which usually requires an upfront fee.
  • Most lock-and-shop programs have a float-down option, allowing you to relock if rates continue to drop after you find a house.
  • If rates go up, then you have no worries — the rate is locked and you are protected against further increases in the rates.

Final thoughts

These windows of low interest rates tend to be short-lived. If you trusted the lender you’re working with enough to fill out a loan application and have your loan locked, then you generally should trust them to finish the loan for you.

When rates drop, lenders often become inundated with refinances, and you may find that it takes months to complete your loan. Keep that in mind if you’re thinking about lowering your rate after you’re already locked in. The sooner you complete your refinance or purchase, the sooner you can benefit from the interest and payment savings.

 

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