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.
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