The financial markets reacted to the initial uncertainty surrounding the Trump Administration with a post-election uptick in mortgage rates. Despite the recent increase, interest rates are still lingering near historic lows. But, how long will the low rates last? According to a recent Zillow article, “This dramatic rate spike might level off near-term, but don’t count on a reversal back to record lows.” If the economy continues to gather momentum and inflation picks up, chances are good that the Fed will increase rates at the final policy meeting of the year in mid-December. There’s still time to act on low rates before another increase and a rate lock can help ensure that you don’t miss an opportunity! Here’s what you need to know:
What Does it Mean to Lock in a Rate?
While recent mortgage rate increases may not be cause for panic, you may want to lock in a rate to protect yourself from additional rate increases while you complete the loan process. A rate lock is a guarantee from your lender that you can obtain a loan at a certain interest rate, at a certain price, within a specific time period.
The first step is to research rates, which you can do by contacting a mortgage professional or submitting an inquiry online. As you shop around keep in mind that both the interest rate and the Annual Percentage Rate (APR) will be quoted. It’s important to understand the differences in the rates in order to accurately compare quotes.
The interest rate is the cost of borrowing the principal loan amount and is used to calculate your monthly payment. The APR reflects not only the interest rate but also the points, fees, and other charges associated with the loan. For that reason the APR is usually higher than the interest rate.
Discount Points and Fees
The cost to obtain a lower rate for a mortgage loan is expressed in points. Each point charged is equal to 1% of the loan amount. For example, on a $400,000 loan amount, the cost of a discount point would be $4,000. Discount points are essentially prepaid interest on the loan, so the more points you pay, the lower your interest rate. Whether or not you should pay points depends on how much money you have to put down at closing and how long you plan to stay in your home. You want to consider if the cost for a slightly lower rate and monthly payment are worth the amount of upfront cost. Ask your lender to review the options with you.
When to Lock
On a purchase loan it usually makes sense to lock in a rate as soon as you go into contract for a property. In the case of a refinance, you should lock your rate at the time you start the application process, which will start the clock ticking. A rate lock is typically good for 30, 45, or 60 days. Ask your lender to explain the costs and rates for different duration periods and make sure the duration of your lock period gives the lender enough time to process the loan.
Peace of Mind
A rate lock can reduce some anxiety over rate fluctuation while you complete your transaction. Contact an experienced loan advisor who can help you consider the costs and benefits of each home financing option and then move quickly when the time is right to lock in a rate and a loan that works for you.
By Amy Malloy