Buyers are getting preapproved for mortgages to better compete in a fast-paced housing market and to be mortgage-ready as soon as they are ready to make an offer. However, preapproval doesn’t lock in their mortgage rate, which can continue to rise .
Some buyers are finding that after their offer is accepted, they must stretch their budgets to afford rising mortgage rates. They face the choice of reducing their homebuying budget or taking on a higher monthly mortgage payment.
In preapproval letters, the quoted mortgage rate is referred to as a “floating” rate, which can rise and fall with the market. Typically, buyers are unable to lock in a mortgage rate until after they sign a purchase agreement to buy a home, according to The Mortgage Reports.
Mortgage rates have gone up by more than a full percentage point over the last six months. The 30-year fixed-rate mortgage averaged 3.89% last week, according to Freddie Mac. Economists largely predict rates will continue to rise throughout the year. Rates are still low by historical standards, but with rising home prices, fluctuations in mortgage rates can make a big difference in what people can afford.
Buyers should contact their lender to verify the current mortgage rate as they prepare to make an offer to make sure a home still fits their budget, The Mortgage Reports recommends. They also may want to budget for rising rates specifically. A preapproval sets the limit for what they can borrow at the quoted rate. House hunters who max out their budget on an offer may therefore face going over that limit after the mortgage rate increases.
Once a final loan application has been approved, buyers may aim to lock in rates. Rate-lock periods often last between 15 and 60 days. Lenders typically recommend that buyers lock their rate in for a period that ends after their anticipated closing dates, helping to prevent delays.
Read more: Buyers Rush to Lock in Rates