Many who planned on searching for a new home during 2016 were shaken by the increase of the Federal Interest Rate during December, a decision that led mortgage rates to rise accordingly. The record low financing that was available ended soon after, and it can only be theorized how far those rates will rise in the next few years.
That might leave you on the fence: Do you pull the trigger now before rates increase again, despite feeling uncomfortable, or do you pull out of the market entirely?
Thanks to long-term interest rate locks, you can take your time when making a decision. This option can help you get ahead of the rising rates curve and set a cap on how much you’ll pay per-month on that property.
There are three strong reasons why a long-term interest rate lock should make your homebuying process a more relaxed, less rushed experience.
Don’t let the specter of rising rates force you into committing to a home that doesn’t work for you and your family! Most mortgages carry out across 30 years. That’s a long time, and it’s not worth lunging for a suboptimal property just because you fear rising interest rates.
Here’s the biggest blessing from a long-term interest rate lock: You don’t need to have your ideal home yet in order to qualify. Buyers can lock in their current rate early on in the shopping process, and often have as long as six months to close on a new home. Now you can work the market for months before settling in, rather than just settling. Traditional interest rate locks don’t offer this flexibility.
This aspect also eases the nerves for home buyers waiting for work to be completed on the home of their dreams. Delays and issues happen during all projects, so it can pay off to have your interest rate locked in ahead of time, to ensure that it doesn’t increase while construction delays prevent you from closing. If you choose to ensure your rate, get an estimate on time of completion and then guarantee your rate for at least a month past that date.
Perhaps you’re not rattled by the implications of rising mortgage rates. If you’re borrowing $340,000 to put toward a home with an FHA mortgage, a shift from 4.25 percent to 4.75 percent will only boost your monthly payment from $1,700 to $1,800. Doesn’t seem too catastrophic right now.
But consider that difference across the 30-year life of your loan. It will amount to nearly $37,000 in savings for the long-term. That might not upgrade you from backcountry to beachfront, but think of how far that will go in buying a car or raising a child.
All the better reason to lock in a low rate while you still can.
Wary borrowers might wonder: If rates take an unexpected turn and lower in the next six months, instead of rising, will I be getting a raw deal in the long run?
No. Generally, if rates fall to a lower point than where your rate lock currently stands, you can work with the lender to bring your rate back down to where it is now. Make sure to take long-term trends into consideration before you jump to bring your rate back down however. Remember that your final rate isn’t official until you close on the home. You can always lower it (if possible) prior to closing.
Still on the fence? Try using this mortgage calculator to get an idea how much you’ll be saving by buying a home at today’s rates versus six months from now, and beyond. If you like what you see, consider guaranteeing in your current mortgage rate with a long-term interest rate lock. The Federal Reserve also offers this Consumer’s Guide for mortgage lock-ins.
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