The Fed announced that it’s prepared to provide additional easing if needed. The bond market responded positively, which brought down the mortgage rate, again.
If you are doing a mortgage refinance, and you already locked your rate and fees, what do you do if you see the rate and fees drop after you lock?
There are several options.
(1) Stick to the deal
That’s what I’ve been doing so far. Market fluctuates. Despite your best effort to figure out when to lock, the rate can still go lower after you lock. If the rate goes higher, you expect the lender to keep their promise and not renege the deal. If the rate goes lower, you should keep your words too.
It’s impossible to lock at the absolute bottom. If the difference is within a few hundred dollars, I would just chalk it up to not having the best luck. A great advantage to doing a no closing cost refinance is that you can always refinance again after you close this one.
(2) Float down
Some lenders include a one-time "float down" option in their pricing. If the rate goes down by at least a minimum amount after you lock, you can get the lower rate, but if the rate goes up, you keep the original lock. Some lenders will charge for this float down option.
If the float down option is free and the rate and fees are still competitive with others who don’t offer it, I’d take the option. I won’t pay for it though. With a new no cost refi, I can float down for free after I close the loan.
(3) Renegotiate
If you don’t have an official float down option, you may still be able to renegotiate. Since the lender or broker can make thousands of dollars from doing your refi, making a little less still beats losing you to someone else. Maybe they will throw in some additional lender credit or drop your rate halfway. It doesn’t hurt to ask.
Ask nicely though, because they don’t really owe it to you. When rates are low, they have plenty of borrowers knocking on their doors. They can choose to make their profit from the next customer.
(4) Abort for a better deal elsewhere
If your lender doesn’t budge, it’s within their right to do so. No hard feelings; it’s just business. If you go somewhere else, you lose what you already paid, like credit check fee, application fee, and appraisal fee. If the rate drops enough, you may still be better off jumping on a new offer elsewhere.
This is especially true if you didn’t get a no cost refi or if the lender you originally picked isn’t offering the best deal to begin with. Suppose you are expected to pay $5,000 closing cost for your refinance. After the rate drops, you may be able to get the same rate from a different lender for only $1,000 closing cost. You will still come out ahead with the new lender even if you lose $500 you already paid. It doesn’t make sense to continue and pay $5,000.
(5) Close and rescind
This is the nuclear option. Use it only if the rate drops a lot and if you would forfeit a substantial amount of money if you abort the locked deal.
Under the Truth in Lending Act of 1968 (15 USC 1635), if you are refinancing a loan on your primary residence with a different lender, you have three days to change your mind even after you sign all the closing documents. The regulations issued under the Truth in Lending Act are commonly referred to as "Reg Z." If you exercise your right of rescission, Reg Z says in 12 CFR 226.15(d)(2):
"Within 20 calendar days after receipt of a notice of rescission, the creditor shall return any money or property that has been given to anyone in connection with the transaction and shall take any action necessary to reflect the termination of the security interest."
Returning any money given to anyone is very broad. It covers fees paid to both the lender and to any third party service providers. The borrower is made whole all the way to the starting point.
Is it fair to the lender who has done work and paid third party service providers for credit check, appraisal, documents, and settlement preparation? Not really, but it’s the law. The lender’s profit margin must cover these fallouts.
If you are planning to use the nuclear option, you must first close the loan and then rescind. You don’t get the right of rescission unless you close the loan.
I would suggest using this option sparingly. If you shopped well before you picked a lender, you normally wouldn’t ever get here. However if you didn’t read my refi series and you locked with a high cost lender, close-and-rescind is a viable option to get out of an untenable deal. I’m not as sympathetic to the lender as I otherwise would be because they didn’t give you a good deal to begin with.
Does it really work? Absolutely. The lenders must follow the law. This poster on FatWallet reported the experience with rescinding a loan from AmeriSave:
"If you cancel the loan before it closes, they subject you to a $500-$1000 penalty (dependent on your loan and/or your state).
If you exercise your right to rescind / cancel your loan after close per the Federal Truth in Lending Act, they are obligated to return 100% of the $ you paid them.
I exercised my right to rescind / cancel an hour after I closed on 8/20/2010, via USPS priority mail, certified, return receipt requested. I received back 100% of all $s paid – this includes but is not limited to the credit report fee and appraisal fee they initially charged my credit card."
Make sure you give your rescission notice in writing, as required by the law and the regulations.
For my current refi, I’m sticking to my original deal. The change in rate and fees isn’t large enough to make other moves.
This is part of a "How to Refinance" series of posts. Other posts in the series include:
- Mortgage Refinance: Is Your Lender Legit?
- Mortgage Refinance: Which Lender?
- Mortgage Refinance: Tradeoff Between Rate and Closing Cost
- Mortgage Refinance: When to Lock?
- How Much Money Does a Bank or Broker Make From a Mortgage Refinance?
- Mortgage Refinance: Before and After Closing
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Kenneth says
LOL…”Ask nicely though, because they don’t really owe it to you”. Seriously, but true.
Great article. Thanks
Lynn says
I am loving your series and wish I had found it before I started my refinancing journey! I’ve “liked” a bunch of your posts so that my friends can benefit from your wisdom.
Can you give me your opinion on this scenario?
I am dealing with a broker at the firm that currently holds my 30 year fixed mortgage on my second home. Before locking a 4.99% rate a week ago Friday the 5th (over the phone), I asked the broker what would happen if rates dropped. He said they only renegotiate when rates drop by 1/2 a point. I said fine. Last week, rates dropped from 4.99% to 4.4% or lower, and I realized I didn’t want to wrap the closing costs into the loan (as I had previously advised, in my DC debt crisis panic moment of refinancing!).
I tried to reach him last week (Thursday, Friday) via voicemail and messages to his colleagues but didn’t hear back from him until now (Tuesday). He is now saying that they charge 5/8 of a point to renegotiate (a fee he had not disclosed) and that he needs approval to consider a renegotiation. In addition to wanting a lower rate, as he had said they would do when rates drop, I don’t want my closing costs included AND I would like him to make the loan based on my husband’s income alone instead of adding in my self employment income, as that would require me to submit 2010 tax forms, which are not complete.
Another point to ponder: I originally told him I wanted to refinance both my homes, which currently have 6% mortgages, and asked if I could get a deal. He said no. I got a quote from my brokerage firm on the primary residence and locked in with them yesterday at 4.4% 30 year rate no points They are preparing to quote me a rate on refinancing the second home, while I’m waiting to hear back from the mortgage holder on the second home about a lower rate. I told the broker when he inquired about the refi on the primary home that I had already locked that with another firm.
Do you have any advice on how I should I proceed?
I understand the right of recission, but would prefer not to go that route.
Naomi Rios says
I was persuaded to lock-in at a 5% interest rate. I refinanced and thereafter rates dropped to 4.3%. I called my loan officer and explained the situation. He said he would check into it and get back to me. After a week, he still has not gotten back to me. I feel he is avoiding me. By paying the difference, is there any way I can get the lower rate and who can I contact to help me with this issue?
Thank you for guiding me in the right direction. Your help is greatly appreciated.
Naomi Rios
Harry Sit says
Lynn, Naomi – I don’t have much to add beyond what I already wrote in the post. The broker/bank isn’t legally obligated to give you the lower rate after you locked. If you haven’t paid much to them yet, you are free to abandon them and start over with a different provider, although you may have to forfeit what you already paid. If the rate difference is substantial, it may very well be worth it to start over. At any rate, your current provider will only get serious when you are serious in jumping ship. Show them the new quote. If they don’t match, say goodbye.
Lynn says
Thank you so much for taking the time to respond. I did just that – jumped ship. I did take the time to call and thank the loan officer for his time and effort, but told him his Management needed to be clearer up front with people — telling customers they can renegotiate if rates drop 1/2 a point and then not following through is not acceptable. They’d only come down to 4.85 from 4.99, so I locked at 4.3 with the other company.
White Lotus says
I’m definitely not an expert on these matters. But I’ve noticed that different lenders have different closing costs. Before you jump ship to a different lender I would ask them for a full quote with closing costs included. Sometimes real estate can be very complicated. You might be getting a lower rate with a different lender, but if the closing costs are thousand dollars higher it might be better just to stick with your current lender. Also, not every lender is forthright with their rate quotes. They may tell you they can offer 4% Apr but only after paying for a point. They don’t tell you about the point and you think you get a good deal. You can’t just look at the rate. It’s important to look at the whole picture.
Dave says
Good info here. Thanks!
If I choose the nuclear Truth in Lending/Reg Z option, does my previous lender reinstate their loan? What happens next?
Harry Sit says
Before the rescission period passes, your new lender is not going to fund the new loan for the payoff. There’s nothing to reinstate. Your existing loan stays with your current lender. You still pay as usual.
john bauman says
ok first apprasial in may 2012 no movement until last week… saying we are to close tuesday… have been given no lock on a rate or anything… and bank asked for a second apprasial since the first rate unlocked and they say the inspection is more than 90 days old …making us pay for second apprasial? what is up? isn’t the law that they have to give us a rate before the closing… which is when they say they will give it to us? 7 months to close as underwriters needed more and more info…
nguyen tan dung says
They act like comunist …
David C Tillman says
Great article. So glad I found it. I called my lender and (very politely) asked for them to lower my rate since there had been favorable activity since my lock. They gave me an eighth of a point for free just for asking. Thanks for the tip!
Heather says
Consider a refi with your local credit union. I got a refi from 4.5% to 3.5% at the time I locked in it was 3.75%I was told that if rates dropped at the time of closing, they would go with the lower rate, if rates went up, I would hold. Rates dropped, I got the reduced amount, no hassle, no charges. Remember your credit union works for YOU! (Bonus, I got my loan away from Wells Fargo, and the credit union doesn’t sell their mortgages.) interesting article, helpful as well.