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Why It Is So Hard to “Roll Down” a Locked Interest Rate When Rates Fall

Why It Is So Hard to "Roll Down" a Locked Interest Rate When Rates Fall

Every borrower of course wants the best of both worlds – they want to be fully protected by a “rate lock” if interest rates go up, but they also want to roll down their rate if rates fall.

This puts all mortgage lenders in a very difficult situation.

I am going to over-simplify this a bit, but in order to protect borrowers from rising rates, lenders “lock in” the current rate by effectively buying an “option” to sell a borrower’s loan to another investor even if rates shoot up by 1%.

These options to sell our loans are contractual obligations of sorts AND they cost money.

When rates fall and borrowers want to roll down their rates, lenders have to pay additional fees to renegotiate their option contract – and those fees can be very high.

So, in order for a lender to roll down a rate and not end up losing money, rates have to fall significantly before they can afford to offer a roll-down.

This is why many lenders do not even offer rate-roll-downs.

We do offer rate-roll-downs of course, but rates have to fall about 1/4 percent before we can offer even an 1/8 percent roll-down.

We always encourage our borrowers to lock in their rates as quickly as possible both so we can move their transaction ahead and so we can protect them against potentially rising rates.

We remind borrowers of two things: (1) that we can roll down their rate if rates fall “significantly” (by about 1/4 percent) during the escrow period; and/or (2) we can lock in a no-cost refinance four months after close of escrow if rates fall.

Many borrowers follow the market closely after we lock in their rates and then request a “rate roll-down” if the market moves even marginally.

But, the problem is that we already lock our loans very “thin” or with very little “commission” to us, so we would end up losing too much money in most cases if we rolled down rates after every marginal drop in rates.

We are nonetheless able to offer rate-roll-downs from time to time when rates do fall significantly, but we always end up paying substantial fees to do so and we always end up making a lot less money than we had anticipated with our original rate-lock.

We are happy to pay these fees and to make a lot less or even no money on occasion as a service to our agent-partners and clients.

We cannot, however, afford to lose money when we close a loan. And that would often be the case if we tried to roll down a borrower’s rate after only a marginal movement.

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