What happens if I’m preapproved and then rates rise?
You won’t lock a mortgage rate when you get preapproved. In fact, you can’t lock your rate until you have an offer accepted.
So what happens if you get preapproved and then rates rise?
Well, it could reduce your home buying budget. Or it might mean a slightly higher monthly mortgage payment. But that will depend on your situation – and on the home you plan to buy.
Here’s what you need to know.
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Do I lock a rate when I get preapproved?
No. When you get a preapproval letter, the mortgage rate you’re quoted will be a ‘floating’ rate. In other words, it will rise and fall in line with the overall market.
Your first chance to lock a mortgage rate is typically after you sign a purchase agreement to buy a home and have your loan application finalized. And, while you might decide to float your rate in the hopes that rates go down, you generally have to lock your rate at least five days before you close no matter what.
You can track what’s happening to mortgage rates and where we think they’ll head in the future on our daily rates report.
Can your mortgage rate change after you get preapproved?
Yes, your mortgage rate can change after you get preapproved. And if rates are volatile at the time, it might change by quite a lot.
That’s great when mortgage rates are falling. Each drop lowers your monthly payment and means you can afford to borrow more – or borrow the same amount and have a lower mortgage payment each month.
But the opposite is true when mortgage rates are rising. Each increase raises your monthly payment and means you can afford to borrow less.
If you are caught out by higher mortgage rates and find a home that you want to buy, you should call your lender to see whether that property is still within your budget.
Budget for rising rates to avoid surprises
Keep in mind that your preapproval letter tells you the most you can borrow at your quoted rate. And you don’t have to borrow the maximum amount. In fact, some home buyers choose to borrow less in order to keep more flexibility in their budget.
If you’re under budget and rates rise, it might not be as big of a deal. That extra wiggle room could give you the flexibility you need to still afford the home you want – even at a higher rate.
But if you’ve already maxed out your preapproved budget and rates rise, it will be a bigger problem. You’re more likely to be priced out of the homes you’re looking at and may have to change your plans to accommodate.
When can I lock my interest rate?
As already explained, your first opportunity to lock your rate will come once your final loan application has been approved. And that can only happen after you’ve signed a purchase agreement for your chosen home.
Be aware that no rate lock is open–ended. You have to close within a set time frame (the lock period) in order for the rate to be guaranteed.
Rate lock periods often last between 15 and 60 days, depending on your lender’s policies. If your lock period expires before you’re ready to close, you may be able to renew it for a fee. Or your rate may revert to the market rate (meaning it could go up).
Ask your lender about its locking policies. In particular, ask:
- How long its lock lasts
- Whether you can renew it and at what cost
- If it offers a lock option that stops your rate rising but still allows it to fall if market rates do
One last thing, try to lock your rate for a period that ends a couple of weeks after your anticipated closing date. Delayed closings are sufficiently common that there’s a real risk you could be caught out.
Best advice for locking your rate
Most of the time, the point at which you lock your rate makes little difference. That’s because, over a typical closing period, mortgage rates usually don’t move much.
But, when mortgage rates are falling fast, you’ll want to put off locking until the last possible moment. And when rates are rising quickly, you’ll want to lock as soon as possible.
At the time this article was written, mortgage rates had been rising exceptionally quickly for months. And The Mortgage Reports was urging readers to lock their rates immediately. But that may have changed by the time your read this.
Don’t neglect comparison shopping
Just because you worked with one lender to get preapproved, doesn’t mean you have to stick with it.
The lender you got preapproved with won’t necessarily offer the lowest rates and fees. So once you’ve signed a purchase agreement, it’s a good time to apply with multiple lenders and find the best deal on your mortgage.
Each lender will give you a quote (“Loan Estimate,” in the jargon) which will clearly list the rate, terms, and loan type for which you qualify. And you could easily save thousands over the lifetime of your loan by comparison shopping.
Nowadays, many lenders can turn around quotes in hours or even minutes. So, your purchase shouldn’t be delayed too much by shopping around.
Your next steps
If you’re in the house hunting phase, make sure you get pre–approved right away so you have a clear idea of your budget and mortgage rate.
Then, once your offer has been accepted, you can get final approval and lock in your interest rate.
Ready to get started?
The information contained on The Mortgage Reports website is for informational purposes only and is not an advertisement for products offered by Full Beaker. The views and opinions expressed herein are those of the author and do not reflect the policy or position of Full Beaker, its officers, parent, or affiliates.