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What can go wrong when locking a loanThis is the incapability or reluctance of a lender to honor a mortgage price a borrower had supposed was guaranteed. For two reasons, the mortgage locks cannot be relied upon. One of the reasons is that the unfavorable event that sets off the insurance – an increase in the rates of interest – negatively impacts all locked loans in lender’s pipelines. Contrarily, the unfavorable event that triggers homeowner insurance is normally an isolated event. A single house fire will not severely destroy a casualty insurance company; however, an increase in interest rate can persuade a lender, who is not sufficiently hedged, into bankruptcy. Another disadvantage of the lock system lies in the fact that a number of borrowers (particularly among those refinancing) gamble the system.
They perform lock on the price with a lender; however, when rates fall, they lock again with a different lender. The cost of locking is raised by this practice and force lenders to look for means of shielding themselves.
A number of lenders make effort to shield themselves against this practice; they achieve this by charging a lock fee which can be credited back to the borrower at closing. However, the fee cannot be refunded if the borrower withdraws from the deal. Alternatively, the lender may insist that the borrower pay one or additional fees, such as an appraisal fee, that the borrower will again pay, if he follows another lender. These conditions are just; however, lenders who impose them will suffer competitive disadvantage; therefore, they are distanced from universal.
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