Choosing the right mortgage rate can be confusing. Rates move frequently and a small difference can mean you have to pay hundreds more or less over time. A mortgage is the most consequential financial commitment a lot of people will ever make in their lives. This is why it is so important to learn how rates are calculated and what types of things impact a rate.
There is less mystery about loans and interest rates than you might think, but with a few key things to know. This way, you know if the advice is coming from a “full spectrum of experts ” and how to pick the best mortgage rate for your specific situation. Plain, sensible advice without all the expert lingo.
Understanding Mortgage Rates: Fixed vs. Adjustable
Mortgage rates fall into one of two primary types: fixed or adjustable. On a fixed-rate mortgage, the interest rate remains constant through the life of the loan. So, your monthly payments will remain the same, making it easier to plan. Are you a cloying person (like me) who likes to keep everything the same way round no matter what happens next, or do you, like the marginal few and those that think adventuring is for other people, fix your rate and will be there in 30 years’ time?
Adjustable-rate mortgages (ARMs), in contrast, can offer a low initial rate for a fixed term, typically 5, 7, or 10 years. After that, it may fluctuate annually with the market. This might make for lower payments in the beginning, but it also means you face higher potential payments down the road. For buyers who expect to move or refinance before the rate adjusts, ARM’s could be an appealing choice.
The answer as to which of the two you should use will entirely depend on your financial standing and plans for the same. Fixed rates are safer in that you can have fixed, predictable payments. If you can stomach a bit of uncertainty and are motivated to save cash in the short term… this might BE for YOU.
Just keep in mind, there is a range of mortgage rates between loan types and among lenders because of offers that change over time due to market conditions. You can click here to compare your options carefully. There are key concepts, and learning these basics will allow you to make better decisions so that you’re not faced with a surprise down the road.
Factors That Affect Your Mortgage Rate
We know that your financial profile is FAR more important than the market when it comes to what rate you get on your mortgage. The most influential is your credit score. The rate the lenders would offer you is better if your score is higher. Even a modest bump in improvement of five or ten points can save you thousands throughout the life of your loan.
How large a down payment also factors in. The more money you can front, the less risky a borrower you are, and that often equals a lower rate. Housing Tip #4: Avoid extra costs by making a down payment of 20% or more, which can save you money on the cost to borrow, and eliminate (for many) the need to purchase private mortgage insurance [PMI].
Rates also depend on loan amount and type of property. Jumbo loans, which are over conforming limits, they’re riskier for lenders and often carry higher rates. In most cases, an investment property or second home will carry a higher rate than a primary residence because they represent riskier collateral.
Finally, a big part is the atmosphere of the entire economy. The interest in mortgages mimics wider financial markets, tied to inflation expectations, Federal Reserve policy, and yields on Treasury bonds. However, you have no control over this, but it does help identify when is best to lock in a rate.
That is why shopping around with a few different lenders is so important. For the exact same credit profile, they might give you different rates and fees. When you get quotes from multiple agents, you can make sure you are getting a good deal and do not miss out on possible savings.
How to Lock in a Good Mortgage Rate
Mortgage rates fluctuate daily, sometimes hourly. So when you are buying a home, timing is everything. Lenders offer a rate lock to protect you against the impact of interest rates. What this means is that it locks in a certain rate for the loan processing period, usually about 30-60 days.
If you have a feeling that rates will go up or if doing so would give you peace of mind during the closing process, it might be a good idea to lock your rate. But rate locks do not come without cost: some lenders do charge for locks, particularly those extending beyond a 60-day limit. Make sure you know what these costs are in advance
It is also difficult to time the lock. Otherwise, you could be locking way too early (and losing out when rates do drop). Wait too long, and rates could be sky high. Most experts recommend MCRs keep a watchful eye on the market trends, and work very closely with their lender or mortgage broker before deciding when it’s best for their situation.
A “float down” option is something that some lenders provide. Allows you to lock in your rate but potentially get a lower one if rates go down before closing. This is why free cancellation works as a nice insurance to have, but that often just comes with an additional cost.
Get all of that in writing, too. Verify the length of your rate lock, if there are any costs, and what will happen or what you need to be aware of if your loan doesn’t close on time. Knowing those, and being upfront, will prevent surprises and guarantee a good deal. Some main takeaways regarding rate locks are:
- When your refinancing is loan locked, it means that you have a set period (usually 30-60 days) where you are guaranteed your mortgage rate and can close at the same rate.
- Peaks during the rate lock window are protected
- Rate lock fees: Agree on a longer term, and there could be a fee.
- The key is timing your lock correctly — too soon or too late, and it will cost you.
- The good news is that many lenders have provisions called “float down” options where you can still take advantage of falling interest rates for a fee after locking.
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