If interest rates hike while you’re under contract, you’re not stuck.
What happens if interest rates rise after you’ve already gone under contract? Is there any way to protect yourself?
Usually, mortgage lenders provide a floating rate during the pre-approval process. A floating rate is an estimated rate that could increase or decrease depending on what’s happening in the market. That’s why you should assume your rate will be higher than you were quoted and budget for that. This may shrink the pool of houses available to you, but it also means that you won’t have to cancel a deal simply because interest rates escalated during the process.
Once you’ve gone under contract, your lender will provide an actual rate which you have the option to lock in between when you apply for the mortgage and the closing date. In a market with climbing rates, you should lock yours in as soon as possible to prevent it from increasing further.
Most rate locks (also called rate commitments) last between 15 and 60 days. Remember to ensure that your lock extends past your closing date because your rate could shoot back up if it expires before you close. Get a longer rate-lock period than it seems like you’ll need, just in case, and ask your lender if there will be a fee to renew it.
“You should assume your rate will be higher than you were quoted and budget for that.“
Occasionally, however, your lender may be able to lock in your rate when you first apply for a loan. Besides the reasons above, this can be useful because it will likely take your lender several weeks or longer to prepare, document, and evaluate your loan application. If your interest rate and points are locked in, you should be protected against upticks while your application is processed.
What if rates decline after you’ve locked in yours? Unfortunately, once you’re locked in, you can’t change your rate. However, there are two ways to get a lower rate after locking in.
First, you can always cancel your loan application and find a new lender. Second, you could ask your lender if they provide float-down options, which prevents your rate from jumping up but allow it to go down if market rates begin to deflate again. With that said, float-down options commonly come with an extra cost in exchange for a lower rate. However, if the savings you’ll see from a lower mortgage rate are big enough, it may still be worth it.
If you have any questions or want to learn more about mortgage rate locks and float-down options, don’t hesitate to call or email me. I would love to help you.
