Mortgage Rate Lock Cancellation Junk Fee
by William in Fresno, California
Ask Kate if a mortgage rate lock cancellation charge is a junk fee: William wants a VA home loan cash-out refinance. After locking in his interest rate, another bank offered better terms. But the first lender has a fee for cancelling a lock. William asks if charges to cancel a lock-in agreement are junk fees.
Ask Kate: VA Home Loan Rate Lock Agreement Fee By William in Fresno, California
I am trying to refinance my VA loan from an ARM to a fixed rate with cash out. I received a quote from a lender for 4% with 95% of the appraisal value, as He said that is the max the VA allows. I had been shopping around for several months and some lenders would tell me 95% and some would say 100%. I accepted the offer for the 95%, we had the appraisal, I signed a Rate Lock agreement and proceeded with the loan process.
A month later, I received a call from another lender trying to refinance my ARM to a fixed rate. I told him I was already in process, he asked me to hear his offer and compare for the best deal. I did not tell him what I was offered from the other lender.
He asked the usual questions, came back with a rate of 3.75% with 100% cash out. As that would be an additional $11,000 for me, I told him I will work with him.
When I told the 1st lender that I was going to move forward with another lender, he asked me if I was willing to pay the cancellation fee. (I wasn't aware I had a cancellation fee) I didn't respond to his question but went on to tell him I was getting 100% refinancing which meant an additional $11,000 to me.
He said that was impossible, not allowed by the VA. He later, called me to inform me that it is allowed by the VA and he could match that, but he could not get me the lower rate without me buying down the rate.
I did look at all the papers I signed and found on the Lock Rate Agreement a statement that there is a $595 fee if I cancel within the lock-in period.
My question is if I go with the 2nd lender's offer, do I have to pay the cancellation fee? The second lender is telling me I cannot be charge a cancellation fee.
I would not change because the rate differences are moderate, but I feel the 2nd lender is more competent and will get the loan closed sooner.
Kate's Answer: Mortgage Rate Lock Cancellation and Junk Fees
Although the funds for VA home loans, a zero-to-low-downpayment mortgage program for veterans and active military of the United States Armed Forces, come from approved lenders, the Veterans Administration (VA) sets the guidelines.
This is because VA guarantees a portion of the loan amount to lenders in the event of a borrower's default.
Among these guidelines are a list of fees that VA allows to be paid by borrowers.
This list is applicable to borrowers who are refinancing an existing mortgage or obtaining new financing to buy a home.
VA Home Loan Allowable Fees
Borrowers are allowed to pay reasonable and customary amounts, for example, the mandatory VA funding fee (which goes to VA), a one percent origination fee (more on this in a moment), and discount points to get a lower interest rate. The list also includes appraisal, recording, title examination and insurance, electronic registration (MERS), and third-party mailing (refinance only) fees. Additionally, the borrower can pay their own property taxes and required insurances, including a flood survey.
Furthermore, the fee charged to the borrower must be the actual fee. So if the discount points are $1000, for example, the lender does not get to throw in another $500 just because.
Mortgage Rate Lock Cancellation Junk Fee
Back to the one percent origination fee... The lender is not allowed to charge the borrower for every fee that they can dream up plus the kitchen sink. This includes underwriting, processing, document preparation, tax service, notary fees and drum roll... interest rate lock-in fees
Now although a rate lock cancellation fee
is not specifically mentioned, I believe it could be assumed that it is in the spirit of VA's list of non-allowable fees and about as close to a interest rate lock-in fee as one could get.
Please also note that VA never allows lenders to charge a prepayment penalty for early pay-off of a mortgage
, regardless if it is a fixed or adjustable rate, regardless if it is a purchase loan or refinance transaction.
Read Your Interest Rate Lock-In Agreement Before Signing
I've said it before but it's worth saying again: Read your rate lock agreement before you sign it
. This goes for VA, FHA, Conventional and any other type of mortgage program that requires a rate lock.
While some may argue that because lenders are charged a fee by investors for cancelling a lock, passing it onto borrowers does not constitute a junk fee. But I disagree. The lender has a choice of investors and probably chooses based on lower rates in return for sharing in the risk of cancellations.
Thus it is my opinion that lenders should accept the cancellation fees as a business expense that is not passed onto borrowers or find new investors.
Do remember, the time to deal with junk fees and other sneaky fine print is before signing loan documents.
Veterans Administration Is on Your Side
Don't forget the Veterans Administration is a powerful ally. Call the Fresno Vet Center at 877-927-8387 if your lender is still insisting on collecting the rate lock agreement cancellation fee. If they do not handle home loan complaints at that location, ask them for the relevant phone number.
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