Mortgage rates are one of those numbers that most people don’t pay any attention to unless they happen to be trying to get a mortgage—a loan to buy a house. Then, mortgage rates become pretty critical!
In April 2022, the mortgage interest rate for a fixed-rate, 30-year loan rose to above 5%. It’s the first time mortgage rates have climbed so high in more than a decade, since 2011.
So what does that mean if you’re trying to buy a house? It depends on where you are in the process. To determine how mortgage rate shifts could affect your buying power, answer the following questions.
Are You Prequalified, Preapproved, or Approved for a Mortgage Loan?
When you’re trying to buy a house, there are different stages of getting a mortgage loan. The first is prequalification, where you enter in different financial details (such as your income and any debts), but there’s no verification required for what you’re entering.
The second is preapproval, where you do have to submit proof that your income is what you said it is, and the same with your debts and assets. For preapproval, you’ll need to provide documentation for the lender, backing up your ability to take on homeownership.
After you’re preapproved for a loan and you find a house to buy, you’ll need to submit the actual mortgage loan application, along with all of your documents, to your lender for underwriting. During the underwriting process, you will be asked if you want to “lock in” your mortgage loan rate. Locking in the rate is what it sounds like: This will be the rate you’ll pay for your mortgage loan, whether rates go up, down, or stay the same before you reach the closing table.
When you’re fully approved for a mortgage loan, that means you’ve found a house that you want to buy, made an offer on it, and the seller has accepted your offer. All the documentation you’ve submitted has gone through underwriting, and everything looks good. By this point in the process, you are essentially ready to buy the house—and you would likely have already locked in your rate.
Depending on where you are in the process, rates going up might not be a big deal (because you already locked your rate in) or a true cause for panic (if you didn’t lock in your rate). A rising mortgage rate means you’ll have to spend more money every month to pay your mortgage and if you were already shopping toward the top of your approval range, suddenly, you might not be able to buy the house you were under contract to purchase. Not good!
Have You Locked in Your Mortgage Rate?
It takes anywhere between four to six weeks to close on a home sale transaction after an offer has been accepted by a seller. Mortgage rates are always shifting, so this can be quite a large window of time to wait for changes that you’ll then try to accommodate!
Lenders will often offer buyers the opportunity to “lock in” their mortgage rate during underwriting so that buyers (and the lender) can have the security of knowing exactly what the interest rate on the loan will be. No surprises!
The benefit of locking in your interest rate as a buyer is peace of mind—and if interest rates happen to go up after you’ve locked in, then you can rest content knowing that you got a better deal than you would have otherwise!
The potential downside of locking in your rate, of course, is that mortgage rates might actually go down after you’ve decided to take the plunge and lock yours. And that could mean a worse deal for you!
If you’re worried about rates falling after you lock in, you can also ask your lender about a float-down—an option some lenders will give buyers (usually for a fee) to “float down” their locked-in rate one time if rates happen to fall.
Are You Still Shopping for a House, or Have You Found One?
You can’t lock in a mortgage rate until you have a mortgage application in to your lender, which requires an address for the house you want to buy. In other words: You can’t lock in your mortgage loan rate until you have a house you’re going to buy.
So if you’re still shopping, then mortgage rates going up means your purchasing power is going to shrink. The top range of what you’re preapproved to buy will fall, and you’ll have to start looking at homes in lower price ranges (if you weren’t already).
If you’ve already found the home of your dreams and you haven’t yet locked in your rate, talk to your loan originator about your options. Ask whether rising rates are going to cause a problem for your current purchase, and ask about locking in a rate right now if you can.
Is the House You’re Buying at the Top of Your Approval Range?
If the house you’re buying is at the very top of your approval range, and your mortgage rate isn’t locked in, then you’re going to have to have a discussion with your loan originator as soon as possible to make sure that you can still afford to buy this house—and can get a mortgage to do it.
Still shopping for a home? This is a good lesson to give yourself some wiggle room financially if you can. The middle of your approval range with one interest rate could be the top of your approval range if rates rise, so sticking to the middle to low end of what you’re approved to buy will be a good decision just in case.
How Much Down Payment Wiggle Room Do You Have?
If you have some additional funds that you aren’t putting toward your down payment, but could conceivably be used for that purpose, then you might want to think about leveraging those if interest rates go up.
Increasing your down payment will decrease the principal amount of the mortgage loan you’re trying to get. In other words, when you put more money down, you’ll need to borrow less from the lender. And that can help with rising interest rates because there’s less principal to charge interest on in the first place. So if your monthly mortgage payment would become too unaffordable with rising interest rates, increasing your down payment could possibly bring those monthly payments back down to a manageable level.
Rising interest rates can be a challenge for buyers to navigate, and working with a real estate agent who understands how your negotiating power has changed and could continue to shift will be key to getting into the house of your dreams.
