Strategies for optimizing your interest rate

It’s no secret that interest rates have been edging up as of late. The Federal Reserve has increasing fears of inflation and is gradually raising rates to keep the economy from overheating. However, rates are still the lowest since 2014 and many Americans with good credit can qualify for a mortgage at around 4.5 percent or less.

If rates do continue to rise as you work on compiling your down payment, there are strategies you should know as you contemplate entering the housing market. A loanDepot Licensed Lending Officer can help you understand the ins and outs of your options. Call today for more information.

In the meantime, here is an overview of a few ways you can get the most bang for your budget by picking a strategy that works best for you:

Get the longest fixed term you can afford

A 30-year fixed mortgage will provide you with the most security payment wise and interest-rate wise. There are no adjustable rates and your principal and interest portion of your payment won’t change. But if you can afford it, a 15-year fixed mortgage payment will help pay off your home loan faster than 30 years with the same benefit of no changes in interest rates and principal. However, the monthly payments are roughly double that of a 30-year, so make sure this is an option you can afford before committing.

Ask for a longer rate lock

With rates rising, mortgage lenders are doing everything they can to help borrowers manage their costs. One of the ways to do this is by increasing the period of “locking” the interest rate either when the loan is approved or when you have a ratified contract to lock in your loan. Typically, lenders offer free 30-45 day “rate locks” meaning that the interest rate that the loan is approved at doesn’t change through the buying process, which means you can shop with confidence and not stress about rates going up during settlement.

With interest rates rising, many lenders are offering longer rate locks for no additional cost, as much as 90 to 120 days, especially when a borrower is buying a new-construction home that hasn’t been built and needs several months to complete.

The last thing a home developer wants is a buyer to sign a contract to purchase a home, but in three months, interest rates rise to knock that buyer out of qualifying. As a result, smart lenders now run your debt-to-income ratio factoring in a higher interest rate just in case, so a move to the upside in interest rates doesn’t throw you out of debt-to-income balance.

Of course, the downside to “locking” for longer is that you don’t get the benefit if rates drop, (unless you’ve worked out with your lender to include a “float-down” provision that lets you take advantage of a decrease in interest rates). But in an environment where rates are rising and the concern is inflation, a lock that keeps you from paying more interest is worth the risk of playing the mortgage market, hoping to save a quarter point.

‘Buy down’ your interest rate or pay for a longer rate lock

A buy down means paying more up front in origination to get a lower rate. You might pay more up front, but the net result is a lower interest rate over the life of the loan. How much it costs up front depends on how much you want to save on a rate. One point more up front could save you thousands down the road.

Paying for a longer rate lock is another way to manage your interest rate costs. While some lenders are offering longer locks for free, you can extend that period even further, providing you pay your lender some more cash up front to guarantee the rate.

How much more depends on how long you want to keep the rate “locked” but this is a good option for those who are looking, but not yet ready to buy, or are waiting on a new home to be finished and need beyond 60 days to close. Extending a rate lock out beyond that period typically costs between 12.5 basis points (1/8th point or 1/8 of a percent) to 100 basis points (1 point or 1 percent).

To discuss all your options and lock in a rate on a home purchase loan, speak with a loanDepot Licensed Lending Officer today.

Published Feb. 27, 2018

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