When you purchase a new home or refinance your current one for home improvement purposes, the current interest rate will determine your monthly payments. For a refinance, this rate will almost always be different than your current one. Your credit history, income, property value, desired updates, and the state of the nation’s economy will all impact the interest rate you’ll get on your loan.
Read the following information carefully to understand how and why rates change, so you can get the best possible deal on your home improvement mortgage loan.
Daily Rate Fluctuations
Interest rates are changed daily by the Fed. As Mortgaged Backed Securities and Mortgage Bonds are traded, and other economic factors fluctuate, so do interest rates. Because rates are set daily, it is possible to shop around for mortgages and get different quotes from different lenders as long as you’re not doing your comparisons on the same day.
Lock-In Interest Rates vs. Loan Commitments
When you decide to move forward with your home loan, you will lock in an interest rate with your lender. This lock guarantees you the interest rate of the day for your loan. Most lenders will lock that interest rate for the amount of time they expect it will take to close your loan. Some lenders will extend that lock if the process takes long at no cost, while other lenders will charge you a fee. It is important to find out how the lender you’re working with deals with those situations so you don’t find yourself spending extra money or losing your desired interest rate.
A loan commitment is the lender’s agreement to lend you a certain amount for your home loan. This is also commonly called a pre-approval. It does not guarantee an interest rate, but it gives you a ballpark amount that the lender will lend you. This amount can fluctuate slightly depending on the home you choose to purchase or if your income, credit, and debt statements change during the loan process.
Making a larger down payment on your property can affect your interest rates. As loan-to-value ratios improve, so do interest rates. This is especially true if you cross the 80% LTV rate for mortgage insurance. Higher LTVs mean a higher risk to the lender. Because of this, they will often offer you a higher interest rate to cover their risk in case you default.
Up and Down
Interest rates tend to fluctuate with the state of the economy. When job creation is going well and unemployment is down, interest rates tend to go up. When the economy is struggling, the Fed will lower interest rates to encourage spending and stimulate the economy. If you’re looking at buying a home or refinancing, it is a good idea to check the news for reports and economic trends. While there are no guarantees what will happen with interest rates from day to day, these factors can give you some idea of what the market trend is and will help you lock in the best available rate for your loan.
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