Changing the Loan After You Lock

July 7, 2003, Revised September 21, 2003 "I locked a 30-year fixed-rate mortgage at 5.625%. At the time, I could have had the 15-year version at 5%, but I was afraid of the larger payment. A week later, when the rates had fallen to 5.5% and 4.875%, I decided I wanted the 15, but the rate they offered me was the original rate of 5%. Is that fair?" It�s more than fair, since the lender charged you nothing for the cost and bother of changing the deal. Some other lenders faced with the same situation would have asked for 5.125% or 5.25%. Changing the loan term gives you no claim at all to the new lower market rate. When a loan is locked, the lender is committed to the terms of the deal if market rates go up, and expects the borrower to be committed if rates decline. Some borrowers behave as if only the lender is committed, by jumping to a new lender when market rates decline, and starting the process again. Lenders can�t prevent this "lock-jumping", but they can and do refuse to accept requests to drop the rate from borrowers who have locked. This holds whether the borrower wants to change the loan or not. If the borrower jumps, so be it. One of these days, market rates are going to start rising. It is not too soon to consider what will happen when market rates rise after the lock and the borrower wants to change the loan. For example, suppose your lock is the same as before (a 30 at 5.625%) and you again decide to shift to the 15, but this time the market rates are 6.5% and 5.875%. Under these circumstances, most if not all lenders will allow the switch only if you pay the new market rate. Since the new market rate on the 15 is above the rate you locked on the 30, switching would not make sense. In sum, if interest rates have fallen you can�t gain by changing the deal after you lock, and you might lose if you need to close soon and the lender elects to take advantage. If market rates increase, changing the deal is almost sure to be a loser. (If there are any lenders who will lock a changed deal at the lower price prevailing on the lock day, I would like to know who they are). It is prudent, therefore, to make sure you know exactly what you want before you lock. September 21, 2003 Postscript.  After writing the above, I was informed by representatives of Countrywide Funding and Wells Fargo that borrowers who want to change their loan can do so at the prices prevailing on the day they locked.   Copyright Jack Guttentag 2003

Jack Guttentag is Professor of Finance Emeritus at the Wharton School of the University of Pennsylvania. Visit the Mortgage Professor's web site for more answers to commonly asked questions.

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