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Shop and Lock

Are you shopping for a home and concerned about the potential of increasing interest rates?  Are you getting quotes for mortgage interest rates today and finding that two weeks later the rates are 0.25% higher?  Do you know what a 0.25% in interest rate means to your monthly payment?  How much could you afford if the rates went up a half point, or even 1 full point?

At today's rate of 4.5% on a 30-year fixed mortgage, the principal and interest payment for a $250,000 loan is $1,266.71 a month.  If that rate goes up to 5.00% the payment would go up to $1,342.05 per month.  An increase of $75.03 a month in payment.  If it increased a full point to 5.5% the same loan would cost you $1,419.47.  An increase of $152.76 per month as compared to the 4.5% rate. That is over a 10% increase in each payment.

Interest rates do not typically jump a full point very fast, but I have seen them increase a half a point in a matter of days.  In typical fashion they go up faster than they come down.  So, the question becomes, if you are shopping for a house, how do you protect yourself from the unstable economic market?

There are programs that allow you to lock a rate while shopping for a home.  Here's some insight into how these programs work.  You complete your pre-approval application, put in a TBD (to be determined) address, and lock in your rate for a specific period of time.  You then have time to both identify a property and finalize the purchase.  During this period of time you should consider getting started on the credit approval portion of the loan to speed up the back process, leaving you with only the appraisal and title work to be completed.   This makes your contract offer look especially desirable, as you would not only be pre-qualified, but fully pre-approved.

Now you ask, what happens if the economy swings and interest rates improve? Normally, once you are locked in, you are locked in to that rate.  But, be sure to ask if the lender offers a "float down."  What this means is that even if the interest rates improve you can still get the better rate.  This is a true win-win situation.

Article written for NELR by Jeff Teplitz, Mortgage Loan Officer, EverBank.

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