Navigating mortgage rates can be one of the most overwhelming and confusing aspects of buying a home. With rates constantly changing, and varying rates being offered by different lenders, it’s difficult to know whether you’re getting a good deal.
Plus, we’ve all heard (or lived!) horror stories of home buyers having their rates jacked up at the last minute, making it impossible to buy the home of their dreams. So, what’s the deal with mortgage rate increases anyway?
Let’s lay it all out:
What is a mortgage rate?
Your mortgage rate is the annual rate of interest you will be charged on your home loan.
There are two main types of mortgage rates: fixed and adjustable. A fixed-rate mortgage means you pay the same fixed rate over the entire life of the loan. An adjustable-rate mortgage (ARM), meanwhile, fluctuates over time.
For example, an adjustable-rate mortgage may feature a starting rate that is fixed for an initial period (for example, the first 5 to 7 years), but will then be adjusted every year thereafter, based on a market index.
The mortgage rate you’re ultimately offered by your lender will depend on several factors, some of which are out of your control.
That’s because mortgage rates are constantly fluctuating based on a host of economic factors, including monetary policy, the economy, market changes, employment rates, and even global politics.
In fact, mortgage rates can change several times per day.
The good news is, not everything is out of your control. The rate you’re offered by your lender is also a reflection of your credit score and overall financial picture.
Applicants with high credit scores and strong financials are typically offered the lowest and most competitive rates a lender has to offer. And remember, even a small reduction in rate could add up to thousands of dollars saved over the life of a loan.
Navigating mortgage rate fluctuations
It’s impossible to predict what the mortgage rate will be on a given day. And with all of this uncertainty, navigating rates can be frustrating while you’re shopping for your new home.
Even a small unexpected rate increase could cost you big over the life of a home loan. Plus, each lender has their own system for calculating what rates they’ll offer.
Keep in mind that rates can shift rather significantly while you’re shopping for a home and going through the underwriting process. For example, the federal government could announce an interest rate hike while you are still searching for a home.
Because of this, many homebuyers choose to lock a rate with their lender early in the process.
Rate locks can protect you (with a few caveats!)
One way you can protect yourself from rate hikes is by locking your rate as early as possible.
A rate lock is an agreement you go into with your lender to guarantee your mortgage rate while they work to close your mortgage loan. This can give you peace of mind in knowing exactly what your rate will be while you secure financing.
Even if federal interest rates go up, you’ll be protected by your rate lock.
Note that there are a few important caveats to keep in mind with rate locks:
- Specific period of time: Most rate locks are only good for a certain period of time. Mortgage rate lock periods are typically anywhere from 30 to 60 days, although they can be longer. Keep in mind that it takes a home loan an average of 43 days to close. Sometimes, it can even take up to 90 days.
- A rate lock is still dependent on the approval of your application: It’s important to understand that your rate lock could be affected if your application information changes during the underwriting process. This is called a change of circumstance. Check out the next section for examples of what could qualify as a change of circumstance.
- You might have to pay a fee: Some lenders may charge a fee for locking in your rate. Usually this is somewhere around 0.25% of the total loan value, but it varies by lender. Make sure to ask your lender to explain all associated fees with rate locking before making a decision.
Despite these caveats, an early rate lock can be a smart choice for buyers who are looking to stay on top of the market.
Can a lender increase your rate after giving you a lock?
Once your rate is locked, a lender can’t change it arbitrarily. However, there are a few instances where a lender can increase your rate after it’s already been locked.
When your application has a significant “change of circumstance,” it can affect your rate.
What is a valid change of circumstance? Typically a change of circumstance comes into play when a borrower chooses to make a change that would not otherwise affect their ability to qualify for a loan, or circumstantial changes occur that are out of either parties’ control.
The following are a few examples that could cause a lender to change your rate after a lock:
- You change the type of loan (such as moving from a fixed-rate to an adjustable-rate)
- You change loan programs (for example, switching from a government to a conventional loan program)
- You decide to change the down payment amount
- You increase the loan amount
- The home appraisal turns out lower than expected, increasing your loan-to-value ratio
- Your credit score decreases
Remember that if your lender decides to increase your rate after your loan is locked, they must explain why in writing. You should never hesitate to ask your loan officer for more information about rate changes, and how they can affect you.
Other tips to protect yourself from unexpected rate increases
Yes, rates are unpredictable. But that doesn’t mean there’s nothing you can do to protect yourself. Besides locking in your rate early, there are a few other ways you can try to prevent unexpected rate increases.
Get your financial ducks in a row
A lender could increase your rate if there is a change of circumstance on your application, such as a decrease in your credit score, or you decide to make a smaller down payment.
Before you go into the lending process, it’s a good idea to get your financial ducks in a row, so to speak. Work on raising your credit score, and saving a good chunk of money for your down payment.
Consult with a financial advisor to make sure you’re staying within your house budget, protecting your financial portfolio and setting yourself up for success.
The more prepared you are going into the lending process, the less likely you are to have major changes on your application (pending elements that are completely out of your control, such as home appraisals!).
Be meticulous during the lending process
Buying a home is a busy, stressful period in your life. It’s easy to lose track of things in the process.
However, one thing you definitely don’t want to do while you’re waiting for your loan to clear is miss a payment, or do anything that could adversely affect your credit.
It’s important that your credit score doesn’t drop while your loan is processing, or unfortunately your interest rate could be affected.
Work with an ethical lender
All lenders are not created equal. When choosing a lender, go beyond comparing rates.
Transparency in lending is extremely important, too. Your loan officer should explain your rate to you clearly, and should also explain any potential risks in your application.
A trustworthy loan officer will do everything in their power to protect you from rate increases while they see your application through. Find a lender you trust, who has your best interests in mind.
Header Image Source: (Jonathan Francisca/ Unsplash)