Rising rates take toll on borrowers

But early this month, Cohen received a letter from the lender notifying her the rate she had locked in -- 5.5 percent -- was no longer available. Instead, she was faced with 6.25 percent -- about the same as her current rate.

Eventually, Cohen and the lender agreed to split the difference, making the rate on the 30-year fixed loan 5.875 percent. But Cohen, an environmental policy analyst, is still fuming.

"We're outraged," she said. "We feel they should have honored the rate."

A growing number of borrowers are realizing they haven't dodged spiking interest rates. Specifically, many consumers are finding their rate locks -- which freeze the rate during the funding process and protect them against rate increases -- have expired, forcing them to abandon their purchase or refinancing, shift to more volatile adjustable-rate mortgages, or, as in Cohen's case, pay more than they had expected.

For Cohen, the difference between her monthly mortgage payment at 5.5 percent and 6.25 percent would have been about $100. With the negotiated rate, she will save about $50 per month.

In some cases, it seems lenders and mortgage brokers did not respond quickly enough in a fast-changing market. Though rates edged down slightly to 6.24 percent this week, the national average rate on a 30-year mortgage rate jumped from 5.21 percent in mid-June to 6.34 percent the week of Aug. 7, according to mortgage giant Freddie Mac.

When rates were tumbling, rate locks -- usually made in 30- or 60-day increments -- were not crucial. Many lenders gladly extended the locks if they expired. Some borrowers were able to secure lower rates after the lock ended.

One culprit behind the busted rate locks is the huge volume of home purchases and refinances. Historically low interest rates and fears about the gyrating stock market have pushed the housing sector -- and specifically the mortgage industry -- to new highs.

A full pipeline wasn't a problem when rates were falling and mortgage lenders, title companies and appraisers were hiring. But now, rates have risen dramatically, so the market is contracting at the same time a massive backlog of paperwork is still winding through the system.

"Some lenders are taking four months to get loans through," said Kevin Clay, owner of mortgage brokerage Reign Financial in San Carlos, Calif.

"We're definitely still processing a lot of loans," said Kirk Fraley, a vice president and regional sales manager for Washington Mutual.

Still, Fraley said that if Washington Mutual's loan processing time exceeds the duration of the rate lock, it will honor the rate. But if the borrower fails to hand in paperwork on time or otherwise delays the process, he might have to pay fractions of a point -- a point is usually 1 percent of the loan principal -- to keep the rate. Wells Fargo has a similar policy.

Most lenders say they evaluate rate extensions case by case.

Mortgage brokers may also be at fault, said Clay. Some may have waited too long to lock, thinking rates would move lower. Others may have locked in rates for a shorter time in order to offer ultra-low rates -- putting the client in jeopardy if the lender could not fund the loan in time.

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