Mortgage rates significantly impact the overall cost of purchasing a home. When it comes to getting the lowest interest rates, two pieces of advice hold true — shop around and raise your credit score. While your creditworthiness as a borrower affects the mortgage rate you’ll be offered, economic conditions and governmental monetary policies affect interest rates on a national scale. Knowing what factors affect your mortgage interest rate can help you better prepare for the homebuying process.
Why And How Often Do Mortgage Rates Change?
Mortgage rates are in constant flux, changing all the time every day. Each morning, Monday through Friday, banks and other lenders receive mortgage rate sheets that stipulate that day’s interest rates. These rate sheets are released daily, Monday through Friday, except on holidays.
So, why do mortgage rates fluctuate so much? A lot of factors impact mortgage rates — same as with stocks.
The Federal Reserve
Even though the Fed doesn't set mortgage rates, its decisions can indirectly greatly influence them in the short term. For instance, the Covid-19 pandemic triggered severe disruptions in the Treasury Market, which raised the cost of borrowing money to unprecedented levels. In response, the Fed bought billions of dollars in Treasuries and mortgage-backed securities that pushed mortgage rates to historic lows.
During recessions or periods of economic turmoil, investors gravitate towards low-risk securities like mortgage bonds, which, in turn, lowers mortgage rates. The opposite is true when the economy is thriving.
Mortgage rates fluctuate based on the rules of supply and demand and are impacted by factors such as the Fed’s monetary policies, the bond market, and inflation. As you comparison shop, understand that the average mortgage rate isn’t necessarily the one you’ll qualify for, as your individual mortgage rate will depend on your creditworthiness and financial health.
Can I Lock in My Mortgage Rate After I Get Approved?
Yes, you can lock in your mortgage rate after you get approved. However, it’s crucial to ensure that you’re locked at an interest rate you’re comfortable with. A mortgage rate lock freezes your interest rate until the loan closing. Since mortgage rates are constantly fluctuating, the rate can fluctuate enough to cost or save you thousands during loan processing or underwriting.
With a mortgage rate lock, a lender essentially guarantees to keep your interest rate constant for a specified period. Doing so protects you from higher rates, but it also keeps you from benefiting from lower interest rates. Lock periods can last 30 days, 60 days, or longer. It’s advisable to select a period that allows plenty of time for loan closing. The benefits of locking in your mortgage far outweigh the risks. For instance, you might be required to come up with a higher down payment if the rates go up.
Do Banks Match Mortgage Rates If I Get Approved for a Lower Rate with a Different Bank?
Believe it or not, mortgage lenders will compete if you let them. Shopping around for a mortgage increases your chances of getting a loan with a lower interest rate and more favorable loan terms. It’s not guaranteed that your preferred lender will match the mortgage rate offered to you by another lender. When you apply for a mortgage, the lender will thoroughly vet your credit history, income, and finances to determine your risk as a borrower. Different lenders have different risk tolerances, and some may be unwilling to match the interest rate from a different financial institution.
That said, shopping around gives you the power to negotiate for a lower mortgage rate. Lenders do have some flexibility with the rates they offer you. Don’t be afraid to approach your bank with a lower estimate — they might match it. It never hurts to ask.
How Will I Know What Rate I Will Be Approved For?
The only way to determine what mortgage rate you'll be approved for is to go through the preapproval process. Remember, your rate can vary by lender — doing so with several lenders allows you to find the best deal. You'll be required to fill out a mortgage application with each lender and provide extensive documentation on your job history, income tax returns, bank statements, and more. The lenders will also run a credit check on you to determine your borrower risk profile. Getting rate quotes from different lenders is an involved process, but it ensures you get the best mortgage rate possible, helping you save money in the long run.
If Mortgage Rates Increase/Decrease After I Get Approval, Will the Lender Adjust My Mortgage Rate?
Yes, but only if you don’t lock in your mortgage rate. Locking in your mortgage protects you from rate fluctuations. Some lenders allow for a one-time "float down" that enables you to capitalize on lower rates, but you might have to pay extra. Skipping the rate lock is a gamble. You might benefit from lower interest rates or have to pay more in monthly payments if the rates rise.
Shop and Save with Different Lenders
If you’re ready to take out a mortgage, it’s crucial to monitor the mortgage rates in your area so that you can apply for a rate quote when the market conditions are favorable. Interest rates change by the day and from one lender to another, making it incredibly beneficial to shop rates with different lenders — a seemingly small decrease in your rate could potentially save you thousands over time.
FAQ #1: How Will I Know What Rate I Will Be Approved for?
It's impossible to know what rate you'll be approved for without going through the preapproval process. Mortgage rates fluctuate daily, and different lenders will offer you different rates based on your creditworthiness as a buyer. It's important to check with different lenders so that you can select the interest rate and loan terms that work best for you.
FAQ #2 - How Long Do You Have to Own Your Property Before You Can Apply to Lower Your Current Rate?
Mortgage refinancing allows you to capitalize on lower interest rates and reduce your monthly mortgage payments. There are a lot of factors that play into how soon you can refinance, like what loan program you used, what your credit score is, and how much equity you have in your home.
FAQ #3: Is a Fixed Mortgage Rate Better Than an Adjustable Rate?
It depends on your circumstances. If you’re looking to sell the house or refinance within 10 years, an adjustable-rate mortgage will help you exploit lower interest rates and save money. However, if you intend on staying in the house for an extended period, a fixed-rate mortgage ensures you don't have to face the risk of rising interest rates.