Do the fattest pigs get slaughtered first? There seems to be an epidemic of greed amongst today’s mortgage consumer. I am going to try and outline why it is not a birthright to get a lower interest rate if you have locked into an interest rate, and then rates drop a little during your transaction.
If you are a logical person, who knows the world is imperfect, and do not expect to get the cheapest price every time, or the best parking space, or the tastiest meal when eating out, then stop reading. The rest of this will be a waste of your time. If you are the person that simply always has to get the best goods, or the cheapest price, or the shiniest objects, then read on.
It’s one thing if rates tumble a huge amount, and you find yourself in the middle of processing a loan application with a 4.50% rate, and one month later the rates are at 4.00%. However, it is another thing entirely when you are locked in to a 4.50% rate and rates fall 1/8%, the smallest fraction rates can change, and then you want the new 4.375% rate, and go into apoplectic fits to get it.
Would you take a higher rate if rates go up?
First, if interest rates jump up and the bank asked someone to accept a higher rate because the market had gone up, even though the client was locked in with them at a lower rate, the client would be on the phone with their lawyer ready to sue everyone faster than you can say “give me my money back.” So why does it not work the same in reverse? When rates go up consumers expect to be protected and for the bank to keep the loan locked, but when rates go down the consumer wants the rate unlocked and wants a better deal. That logic would bankrupt any industry.
The cost is passed on
Second, banks spend money on commitment fees and hedging fees to guarantee a consumer the loan they have locked in. Not unlike insurance fraud raising insurance costs, asking to unlock loans to get a better deal costs the bank money, and that cost is simply passed on down the line back to the consumer.
Appraisals become an issue
Third, banks will not accept appraisals from other banks, they have to order them from their own appraisal management company. So if you want to leave one bank to go to another one to get a better deal, you’ll be paying a second appraisal fee to order a new appraisal from the second bank, and starting the loan over from scratch. If you are doing a purchase loan to buy a new home you likely will not have the time in the sales contract to start over, there are strict deadlines in a sales contract. And if you are doing a refinance you are already saving a lot of money or you would not have applied for the refi in the first place, why get greedy?
Problems may arise
Fourth, you could end up blowing the whole transaction by switching lenders for a “little better deal”. In today’s mortgage world getting a loan is very difficult and complicated, and you can be subject to appraisal problems, strict underwriting, unacceptable loan approval conditions and much more. To pay a second appraisal fee, and do more paperwork, and risk not getting your loan through the second gauntlet, is near suicide. I cite some anecdotes about this risk here.
A second appraisal fee
Fifth, switching lenders costs a second appraisal fee (usually $400-$500) and will cost another two month wait while the new loan gets processed. If you were saving $400 a month on the refi to being with, and you are going to put that off for two months to get a “little better deal” at a new bank, that is another $800 you spent by switching lenders. Now the cost is $1200 and a lot of paperwork hassle, and some risk, all to save an 1/8% or $30 a month?
When is enough enough?
Rates are at one of the lowest points in 220 years (see proof here), is that not enough? Does there always need to be “a little bit more”? When is enough enough?
If you buy a stock at $10 a share, and you sell it two months later at $40 a share, you have made a killing. You are happy! If a few days later the stock goes to $41 a share, I doubt anyone would express grave concern and be upset that they missed out on a few more dollars. They still had a big financial win, and life is not perfect! It’s the same way with mortgage rates. If you are paying 5.875% and are refinancing to 4.375%, and you are saving $400 a month by knocking your rate down by 1.5%, and if rates later fall to 4.25% and you can save “a little bit more”, does it really matter? Does your refinance transaction have to be perfect? Do you have to get the lowest, rock bottom rate or you’ll stomp your feet and kick and scream?
Saving a lot of money is not a problem, getting a good deal on a mortgage is not a problem, missing out on a few more ticks on the interest rate ticker is not a problem. Cancer, war and terrorism are a problem. Let’s stay focused. If rates tumble a lot during your transaction, ask for a better deal. If rates go down a few fractions, let it go, its not worth the cost and effort.