Locking the Price Doesn't Mean Locking the APR

December 6, 2004, Revised January 17, 2012

“Recently I locked my $100,000 mortgage at an interest rate of 5.75% and 1 point, with an APR of 5.94%. Now the rate is the same, but I’m told that the APR is 5.99%. I don’t understand this, how can the rate be locked but not the APR? When I asked the lender about it, he spoke to me like I was an idiot, he said yes, of course the APR can change…What good is the Truth in Lending statement if the APR can change all the way to closing? I close in 2 weeks, so I feel like I’m stuck.”

A Mortgage Lock Need Not Include the APR

You are caught up in one of the most perplexing failures of our mortgage disclosure system, one the Federal Reserve could fix easily but doesn’t. The failure is that the annual percentage rate or APR is not locked unless the lender elects to do so.

The APR is a single summary measure of the cost of the loan to the borrower. The easiest way to think of it is as the interest rate adjusted upward for all upfront fees paid to the lender. The APR of 5.94% quoted to you when you locked included fees of about $2,000, whereas the second APR of 5.99% included fees of about $2500. The lender jacked up the fees by about $500 after you locked.

Lender fees are of two types, those expressed as a percent of the loan, called points, and those stated in dollars. You paid 1 point, which on a $100,000 loan is $1,000. Points are locked with the rate, so that $1,000 did not change between the first APR and the second.

Fixed dollar fees, which were $1,000 at the time of the first quote, are not locked unless the lender elects to lock them, as some do (see below). Your lender does not lock fixed dollar fees, and raised them by $500 between the lock date and the date of your recent statement.

This is inexcusable, a stain on the Federal Reserve which administers Truth in Lending. It could fix the problem simply by ruling that a lender locking the price also locks the APR. It is also a stain on the mortgage banking trade groups, which don’t press the Federal Reserve to do this.

Confronting the Lender

With only two weeks before you close on a house purchase, it is too late to change lenders. However, you have one strong card to play: the real estate sales agent, who referred you to this lender.

Lenders often live and die through their referrals, or lack of referrals, from sales agents. The last thing a lender wants is a client who causes problems for the agents who refer customers to them. That could mean the end of the referrals.

If I were in your shoes, I would inform the lender that I expected a settlement statement at closing with the fees shown on the statement you received when you locked. If you don’t get it, you are going to demand that the sales agent who recommended the lender, pay the shortfall. Given the choice between losing $500 and losing a source of referrals, the lender will almost certainly give up the money. Odds are that the lender will also stop treating you like an idiot.

How to Avoid the Problem

Borrowers who find their loan on the  professor's Certified Lender Network (CLN) will never encounter this problem because the lenders on the site include all their fees in the lock. See Why Shop Here: Certified Network Lenders.


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