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 percent) and you again decide to shift to the 15, but this time the market rates are 6.5 percent and 5.875 percent, respectively. 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.

I SKIP THE FIRST PAYMENT?

"My new lender is offering to skip my first payment. I'm tempted to do this because it would help our cash flow and I can't believe it can have more than a minuscule effect on how much I pay over the long pull. Am I right?"

A payment that is minuscule to one is a fortune to another. I'll give you the numbers and then you can answer your own question. They are for a $100,000, 30-year loan at 6 percent.

The initial interest payment on a $100,000 loan at 6 percent is $500. It is .06 times 100,000 divided by 12. If you skip the first payment, the $500 is added to the balance, making it $100,500. In the following month, your interest payment will be $502.50. The additional $2.50 is on the $500 you skipped. Further, the interest payment will remain higher throughout the remainder of the life of the loan, relative to what it would have been had you not skipped the first payment.

If your loan runs for the full 30 years, you will end up paying an additional $2,993 of interest. If you pay the balance off after 15 years, it will cost $864 in additional interest. If you pay off in five or 10 years, it drops to $205 and $486, respectively.

To apply these numbers to your own case, multiply them by the ratio of your loan amount to $100,000, and your interest rate to 6 percent. For example, if your loan is for $200,000 at 4 percent, you multiply by 2 and by 2/3, or by 1.33. The numbers would then be $273, $648, $1,152 and $3,991. Are these minuscule?

The writer is Professor of Finance Emeritus at the Wharton School of the University of Pennsylvania. Comments and questions can be left at www.mtgprofessor.com. 

Copyright 2003 Jack Guttentag