What is a Mortgage Rate Lock?

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The mortgage lending world is full of terms that may not be familiar to you but are important to understand if you are considering buying a home or refinancing. One of those terms is mortgage rate lock. 

A mortgage rate lock is an arrangement between a lender and a borrower in which a mortgage’s interest rate is locked for a certain period of time. Typically, the locked-in rate will be the current market interest rate.

Some lenders choose to charge borrowers a lock fee if they choose to lock in the interest rate. Also, it’s common for lenders to start at a higher rate in case the homebuyers do not exercise their options to lock in a rate.

When a borrower and lender agree to a mortgage rate lock, it is important that both parties are bound by the agreement. This agreement would mean, for example, that the borrower could not unlock the rate because the market interest rate had lowered. Interest rates will usually be locked from the moment that the mortgage is offered until it is closed.

Unless a change occurs to the loan application, the interest rate will stay the same and will not be affected by market changes. Changes to the mortgage application, such as an increased loan amount or an updated credit score for the borrower, can result in the interest rate changing. Interest rates can also change if the home is appraised at a higher or lower amount than expected, or the borrower changes the type of mortgage for which they are applying.

Mortgage rate locks have some drawbacks from the borrower’s standpoint. For example, if the market rate falls during the term of the mortgage, a borrower would not be able to take advantage of these lower rates. The same would be true for lenders if the market rate rises.

A lock deposit can be a good way to make sure that both the borrower and the lender hold to the terms of the mortgage lock agreement. This deposit shows that both parties are committed to upholding the agreement. A loan estimate and a rate lock can be issued at the same time, and the period of the mortgage rate lock can be between 10 and 60 days. A longer rate lock period typically means that the borrower and lender have agreed to a higher interest rate.

Questions about mortgage rate locks or anything related to home mortgages? Please contact us today. 

Why Do Home Loan Rates Move Up and Down?

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More now than in recent years, we are hearing the question: Why are home loan rates rising so much? 

The Federal Reserve monitors the U.S. economy and, when necessary, takes steps to address inflationary concerns to avoid economic recession. When the Fed discusses interest rates, it is primarily concerning the Fed Funds Rate, which is the rate banks use when lending money to each other overnight.

Home loan rates, on the other hand, are dictated by the trading of Mortgage Backed Securities (MBS), which are a type of Bond.

At the real heart of home loan rate movement is the dual relationship between Stocks and Bonds, as they compete for the same investment dollars on a daily basis. Inflationary pressures, economic conditions and geopolitical events all influence the direction of both Stocks and Bonds.

When economic reports are weak or disappointing, investors often move their money from riskier investments like Stocks into Bonds, which are considered safer. Since home loan rates are tied to Mortgage Bonds, this helps home loan rates improve.

In contrast, strong economic news often causes investors to move their money into Stocks to take advantage of any gains. This can cause Mortgage Bonds and home loan rates to worsen.

Inflation reduces the value of fixed investments like Bonds. This means that a low inflation environment tends to be good for Mortgage Bonds and home loan rates, while high inflation can cause both to worsen.

Political turmoil or economic crises around the world can also cause investors to move their money into the safety of the Bond markets, helping Mortgage Bonds and home loan rates improve.

If you are second-guessing whether now is a good time to purchase a new home, contact us. We’ll analyze your financial situation together and create a plan that’s right for you. And if you have friends or family members considering a home purchase or refinance, please share our information with them.

You Can Take Control of Some of What Affects Your Home Loan Interest Rate

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Interest rates are at the top of everyone’s minds right now, especially if you are in the market for a home. But your interest rate isn’t set in stone. Several factors play into the interest rate on your loan, and you are in control of a lot of what affects it. Here are some of the things that can affect the interest rate on your home loan. Let us know if we can help you determine what your home loan may look like.

1. Credit scores
Borrowers with higher credit scores generally receive lower interest rates than borrowers with lower credit scores. Lenders use your credit scores to predict how reliable you’ll be in paying your loan. Credit scores are calculated based on the information in your credit report, which shows information about your credit history, including your loans, credit cards, and payment history. If you’re considering buying a home now or later, check your credit score and do what you can to get it as high as possible.

2. Home location
Your home loan’s interest rate may be impacted by the in which you are purchasing. Part of this could be due to the health of the housing market in your state or county. If the housing market is healthy, the lender is less likely to risk default on the loan, so the interest rate may be lower.

3. Down payment
The more money you put down on your home, the lower your interest rate will likely be. You don’t have to put down 20 percent to get a loan, but if you do, you may get a better interest rate.

If you cannot put down 20 percent or more, you will be required to purchase private mortgage insurance (PMI). PMI protects the lender in the event a borrower stops paying the loan. The cost of PMI is added to the overall cost of your monthly mortgage loan payment. You may be offered a slightly lower interest rate with a down payment just under 20 percent, compared with one of 20 percent or higher. Why? You’re paying mortgage insurance, which lowers the risk for your lender.

When determining your down payment and subsequent interest rate, keep in mind the overall picture of what you are borrowing. The larger the down payment, the lower the overall cost to borrow. Getting a lower interest rate can save you money over time. But even if you find you get a slightly lower interest rate with a down payment less than 20 percent, your total cost to borrow will likely be greater since you’ll need to make the additional monthly mortgage insurance payments.

Look at the overall loan and payments, not just the interest rate, when getting a home loan.

4. Loan term
The term of your loan is how long you have to repay it. In general, shorter term loans have lower interest rates and lower overall costs, but higher monthly payments.

5. Interest rate type: fixed or adjustable
There are two general types of interest rates: fixed and adjustable. Fixed interest rates do not change over time. Adjustable rates may have an initial fixed period, after which they go up or down each period based on the market.

Your initial interest rate may be lower with an adjustable-rate loan than with a fixed rate loan, but that rate might increase significantly at a later date.

6. Loan type
There are several broad types (categories) of mortgage loans, such as conventional, FHA, USDA, and VA loans, all of which have different eligibility requirements. Interest rates can be different depending on what loan type you choose. Your lender will discuss different options with you and will help you choose the right loan to keep you and your family financially secure.

7. Discount points
Points, or discount points, lower your interest rate in exchange for an upfront fee. By paying points, you pay more upfront, but you receive a lower interest rate and therefore pay less over time. Points may be a good option if you will keep the loan for a long time. There are also tax benefits for discount points for the purchase of your primary residence. Talk to your accountant or attorney about this.

Getting a home loan is about more than just the cost of the house or the interest rate. There’s a lot to understand, and it is our privilege to help you navigate the home buying process. Please contact us if we can answer any questions.

Fed Announces Fed Funds Rate Hike

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After its September 25-26 meeting, the Fed announced an increase to the benchmark Federal Funds Rate by 0.25 percent for the third time this year. The increase, which was expected by investors, brings the new target rate range to between 2 and 2.25 percent.

If you’re wondering what this rate hike means for home loan rates, don’t panic. A rise in home loan rates shouldn’t be expected as a direct result of the Fed’s decision.

This is because the Fed hike is not to all rates but to the Fed Funds Rate, which is the short-term rate at which banks lend money to each other overnight. The Fed Funds Rate is not directly tied to long-term rates on consumer products like purchase or refinance home loans.

In its announcement, the Fed noted that the economy and labor market continue to strengthen and that inflation remains near the Fed’s target of 2 percent. If inflation can stay in check, this could be good news for home loan rates. Inflation reduces the value of fixed investments like Mortgage Bonds, and home loan rates are tied to Mortgage Bonds.

However, continued strong economic news could also benefit Stocks at the expense of Mortgage Bonds and home loan rates if investors move money into Stocks to take advantage of gains. I’ll continue to monitor all these market movements for you.

While home loan rates have ticked higher this year, they remain attractive historically. If you have any questions about whether you can benefit from current home loan rates, please reach out to Universal Lending at anytime.