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Exit Strategy for Mortgage Rate Locks

Think twice before you walk away from a loan for a lower interest rate.

Interest rates can be fickle. It's enough to drive a consumer to distraction. One day you get your home loan approved and lock in a good interest rate, only to find the rate dropping a few days later. What do you do? Are you stuck? Not necessarily. Should you walk away from your loan? Depending on your situation, that's a gamble that may be worth taking, but not if it jeopardizes the closing on your home purchase.

Interest rate locks are a kind of insurance provided as a service to borrowers.  Typically, you don't pay extra fees for a 30-45 day lock-- the cost generally shows up in points on the loan. You get some predictability on your loan costs, and it's basically a gamble that your rate is a fair bargain and won't go considerably lower. For longer locks extending beyond 45 days, sometimes you pay a nonrefundable fee. If you're the daring type, the other option is to skip the lock and "float," and gamble that rates may drop before you close on your loan. (Of course, the float strategy will look terrible in hindsight if rates end up a quarter point higher.) Talk to your loan officer or mortgage broker. Some lenders even offer a third option, the "float down" provision. Under this option, the borrower locks in at the current rate but has one opportunity before closing to change the lock to a new rate if there's a drop. You'll probably pay extra for the float down provision.

Refinance deals are the most flexible and less risky because you're not bound by a home purchase contract closing in a certain period of time.  But remember that walking away from a refinance still could result in losing nonrefundable fees. Homebuyers, on the other hand, potentially stand to lose more, depending on how deep they're in with the lender and how imminent the closing. Make sure you balance the risk of breaking a lock or loan agreement with the benefits in saving on a lower interest rate. It's probably not even worth considering if the rate has only dropped, say, one or two tenths of a percentage point. Let's say you're only two weeks away from your home contract closing. Can you get approval from another lender and close on a new loan in time? Do you want to give yourself and your seller heartburn while you scramble through the process? That's really skating on thin ice, especially after finding the right home at the right price. If you break your sale contract, there could be legal repercussions

Some of the costs from breaking a lock include forfeiting your application fee, and losing any nonrefundable fees paid upfront. You may have to redo the home appraisal if your new lender insists. And you can look forward to redoing all the paperwork and providing verification of employment, income and assets again, although you should have that information handy by now. But to really know the bottom line requires assessing exactly your risks in relation to the savings from grabbing a lower interest rate.

Source used to create this article include Salvatore Caputo and Bankrate.com