Interest rate is one of the most important considerations for a home mortgage loan. Recent trends indicate show that interest rates not only have increased slightly, but will continue to increase over the years.
When it comes time to buy your home, it’s only natural to be a little concerned about interest rates and whether the rates will increase before a home loan closes. Fortunately, there are some steps prospective home owners can take to prevent your home interest rate from skyrocketing and keep your monthly payment from becoming a shock situation.
When you first make an offer on a home, the mortgage loan officer will ask whether you’d like to “lock in” your interest rate. There are lots of options for locking in the interest rate, and the whole premise can seem a bit confusing. What exactly does lock in mean, how much will it cost you and what how long should you lock in?
A rate lock is an agreement you make with the lender to keep the interest rate fixed over a period of time while you loan documentation is processed. Standard lock in periods are 30, 45, 60, or more days. When you lock in an interest rate, you are paying a fee to guarantee the interest rate. The longer period of time you lock into, the higher the fee.
Buyers experience anxiety when they try to figure out if they should lock in, and for how long. There’s no way to guarantee what will happen with interest rates, either short term or long term. In general, when interest rates have been increasing, instead of staying flat or decreasing, it’s better to lock in.
Lock in fees are calculated as a percentage of the house sales price. These fees are called “points”. One point is one percent of the purchase price of the home. As an example, a lender may charge a quarter or half-point to lock in an interest rate for 30 days (actual fees will vary).
If you’ve worked with a mortgage broker prior to finding a home, chances are you are either prequalified or preapproved. When you let the mortgage company do the work before hand, the loan will probably close faster. Your agent or broker can give you an estimate on the amount of time you’ll need to close, and help you determine how long to lock the loan in for.
There’s no reason to feel anxiety about the interest process in home financing. Interest rates are still quite low, and simply by locking into your interest rate you can keep guarantee that the loan will close with the interest rate you want.
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