Residential Construction Loan Interest Rate Lock

by Mark from Columbus, Ohio USA

Ask Kate about breaking a residential construction loan interest rate lock: Hi Kate, Am I stuck or can I break my interest rate lock? I locked my interest rate for 270 days. BUT...


Mark continues... Because of the builder contribution of 4 points, I was able to lock at 4.75 percent when the market was about 5 percent (not locked).

Now that the market has trended down to about 4.5 percent (not locked), is there a way I can/should talk to the mortgage company to see if they will modify to a lower rate? I asked about float-down and they stone walled.

They have a 1 percent ($2600) deposit for the lock and their charges are steep - $5,000 of which the builder pays 1/2.

Given the extraordinary times and such low rates, I have ended up with seller's 4 points coming to naught, not to mention ending up with a higher rate than market.

Do I have leverage (law?) to do anything? It feels cruel.

This is a conventional 30 year fixed rate mortgage with 10 percent down payment and no PMI. Thanks! Mark

Kate Answers: Residential Construction Loan Interest Rate Lock

***zz-portrait-left.shtml*** Dear Mark,

When interest rates trend upward, mortgage companies writhe in pain over lower locked-in rates. But when rates decrease, it's the borrower who feels the agony.

Pros and Cons - Locking The Residential Construction Loan

Many an uproar between homeowner and lender is caused by a Residential Construction Loan interest rate lock. I am not surprised. There is a lot at stake for both parties.

Just like you said, construction loans often require large non-refundable deposits to lock a rate. Yet with so much time between the initial loan application and closing the mortgage, we know rates have the potential to go through the sky if left unlocked.

So not locking causes anxiety. But worse than anxiety, if rates climb too high, the homeowner who didn't lock in might not qualify for the mortgage once the residential construction loan is complete.

Of course, your letter is the evidence that a mortgage rate decrease after locking also causes angst for the homeowner.

Understand Interest Rate Lock Terms Before Locking

Bottom line? Try to negotiate a lower rate. Perhaps the lender would meet you halfway between your locked rate and current interest rates.

But Mark, depending on your mortgage rate lock agreement, you might not have any float-down option. More on your mortgage rate lock agreement here.

If you can't float down to a lower interest rate, remember you were happy with the rate when you locked. But next time you get a mortgage, study your mortgage rate lock agreement and your rights before locking the rate! Here are questions to ask before locking an interest rate.

Opinions Opinions Opinions - Breaking An Interest Rate Lock

Homeowners are not afraid to voice their opinions over breaking an interest rate lock. Scroll down to Ask Kate About Mortgage Rate Lock until you see: Pros And Cons - Reader Views On Breaking Locks.

You'll find high-pitched emotions in lively discussions over these issues and more...
  • Is breaking a lock fair to the lender?
  • Is it ethical to leave your lender for a lower rate after locking?
  • Does a mortgage lender deserve loyalty?
I have also included more rate lock help at the bottom of this page.

Best wishes,


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Timing a Construction Loan Rate Lock Agreement
by: Linda from Spokane, WA

We are in process of building a house on a piece of property. We are trying to decide when and how long (8 month or 9 month) to lock in our interest rate. I am confused at the there much risk in choosing 9 months over 8 months?

Hi Linda, Kate here...

The longer the lock, the more it costs a borrower. But extending a locked rate that is about to expire can be pricey too.

So enlist your mortgage originator to help create a realistic time frame. Allow for time to sign the final mortgage paperwork. Ask about outstanding permits from the county. Add some wiggle room for delays and don't forget to ask about lock extensions, float-downs, and lender delays.

Additionally, you should understand all of the terms in your lock agreement, such as what would happen if your credit score fell while the house is being built... Mortgage Broker Fees - Get 'Em in Writing, Writing, Writing.

Best wishes, Kate

Construction-permanent loan
by: Mary

We've entered into a one-time-close residential construction loan with a local bank. We have not locked in a permanent interest rate, due to current market trends(7/2012) which seem to indicate rates will either stay the same or even go lower in the next 6-12 months. My question is...

Are we obligated to remain with this same bank at time of modifying to a permanent loan? Wondering if it's necessary to check out other banks' rates? Thanks!

Hi Mary, Kate here. Check your loan documents for a prepayment penalty.

But my question is why would you incur the cost of a construction-to-permanent loan if you don't intend to stay with the lender? One of its major attractions is avoiding the double closing costs that accompanies a short-term construction loan followed by permanent financing.

Just a thought.

Best wishes, Kate

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