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Rate Locks – How They Work; Who Pays; Wells Fargo

Rate Locks - How They Work; Who Pays; Wells Fargo

Wells Fargo was sued in 2017 for charging borrowers for “lock extensions” even though the delays that fostered the need for the lock extensions were clearly Wells Fargo’s fault. It was blatantly dishonest on the part of Wells and they deserved the resulting bad press; you can read more about it here.

At JVM, we of course would never charge a borrower for a lock extension fee if the delay is our fault. We also often eat the cost ourselves even when the delays are not our fault. We do this to avoid further delays and b/c our primary goal with every transaction is to foster as much good will as possible even if it costs us a few bucks (and it often does).

Rate Locks: Most people know that interest rates can be “locked in” for specific periods – 15, 30, 45, or 60 days in most cases (the longer the lock period, the higher the rate). Lock periods can be shorter for borrowers who wish to “float” or not lock their rate until the last minute, or longer (over 60 days), but longer lock periods usually require non-refundable commitment fees. Those fees are painful, however, if rates go down during the lock period.

Rate locks provide a couple major benefits. 1) They protect borrowers from rising interest rates; and 2) They allow lenders to prepare very accurate disclosures up front so they can close more quickly. Not locking or floating forces lenders to either “over-disclose” (not good for borrowers) or to re-disclose when the rate is locked (potentially delaying the close).

Rate locks are like a “put option” that allow lenders to sell a loan to an investor at a specific rate no matter how much rates go up. What borrowers don’t understand is that these options to sell a loan cost lenders money one way or another no matter what. This is why it is very frustrating for lenders when borrowers cavalierly want to break locks or simply re-lock if rates fall. Borrowers want the best of both worlds – they want their rate protected if rates go up, but they also want lower rates if rates go down.

Most lenders have a “rate roll-down” policy, but these rate roll-downs require a fairly large drop in rates before they can be taken advantage of.

Issues also arise when the lock period expires and lenders have to “extend the lock” or purchase another “put option” b/c their current option (lock) expired. This too is often difficult for borrowers to understand, but lock extension fees can be significant – up to $100 per day for a $500,000 loan for example. They are painful for lenders to eat if delays are the result of Realtors or borrowers not getting them necessary documents or info. We are, however, very happy to eat the cost of lock extension if the delays are our fault, as I mention above.

Jay Voorhees
Founder/Broker | JVM Lending
(855) 855-4491 | DRE# 01524255, NMLS# 335646