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Does Getting Mortgage Preapproval Lock in A Rate?

Does Getting Mortgage Preapproval Lock in A Rate?

posted in Mortgage News

The short answer is no, when you get mortgage preapproval, it doesn’t lock in the rate, but let’s look at it in a little more detail.

What happens to the rate when you get mortgage preapproval?

When you receive your mortgage preapproval letter, the rate you’ve been quoted is known as a floating rate, meaning that it will rise and fall in line with the overall market.

So, once you’ve got preapproval, your mortgage can change, correct?

Yes, it can, and depending on the state of the market at the time that you got preapproval, it can change quite significantly. This of course works in your favor when rates are dropping – as naturally, it means that your monthly payments are lower and you can afford to borrow more - but not so good when rates are rising, and the opposite occurs.

A mortgage broker can help you get a better understanding of mortgage rates and where they might be likely to head, and can give you some great mortgage advice, in general.

If higher mortgage rates catch you out just as you find a property you want to buy, reach out to your lender (or mortgage broker) to find out if it will still be within your budget.

When can you first lock a mortgage rate?

Usually, the ability to lock in a rate for your mortgage is after you’ve signed the purchase agreement to buy your home, and when your loan has been finalized. While you might take a chance and float your rate in the hope that they’ll go down, you generally need to lock in the rate at least five days before you close, whatever the circumstances.

What it’s important to be aware of, is that rate locks are never open ended, and closing within a certain period of time (known as the lock period) is necessary if you want the rate to be guaranteed. Rate lock periods are usually between 15 and 60 days, but it will depend upon the specific policy of your chosen lender. Should your lock period expire before you’re ready to close, there may be a chance to renew it for a fee, or who knows, your rate may even go up to the market rate.

How to avoid a nasty rate rise surprise

One way of allowing for more flexibility in your mortgage budget, is to borrow less than the amount your preapproval letter tells you can borrow at the quoted rate. Being under budget means that you’re much better placed to deal with a rate rise, and with a little extra room to manoeuvre, you might still be able to buy the home you want, at an even higher rate.

However, if you’ve borrowed as much as you’re allowed to at the given rate, and that rate rises, you could be priced out of the homes you want to buy.

Working closely with a mortgage broker and getting preapproval as soon as possible, can help you navigate the process and lock in your final interest rate, enabling you to purchase the home of your dreams.

 

Mortgage News

15 dMar, 2022

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