Ideally, the path to buying a home starts with getting the best mortgage rate. If it only depends on us, we would be able to spend as much time as we want in search of the perfect home knowing that mortgage rates will not increase in the meantime.
But what happens if mortgage rates change?
If rates go down, you’re in luck. On the other hand, if mortgage rates rise and you are barely eligible for a mortgage, this could make getting the home you are planning to buy a little more difficult.
One of the main benefits of getting a mortgage pre-approval is to secure the best current rates. We will take a look at what would happen if mortgage rates change across two scenarios.
Scenario # 1: Buying a home without pre-approval
Suppose you are going to buy a $ 625,000 home with a down payment of $ 125,000, you get a fixed five-year mortgage rate of 2.33% and choose a 25-year amortization period. Your monthly payments will be $ 2,198. But if the rates increase to 2.53%, or 0.20%, your monthly payment goes to $ 2,247. Each year, the additional interest you pay will be approximately $ 588. Over five years, this amounts to $ 2,940. At this point, another option you may have is to try to find a mortgage lender that will approve you at a lower rate.
Although it is difficult to determine when rates will change, some economists expect an increase in 2017. Since obtaining a pre-approval mortgage is a free and easy process, you have nothing to lose when you secure your rate.
Scenario # 2: Getting Prior Authorization for a Variable Rate Mortgage
If you are pre-approved for a variable rate mortgage, keep in mind that the rate is not guaranteed if the prime rate ever increases. What is guaranteed is your discount on the prime rate if the lender reduces the discount for all borrowers.
We will look at an example of how much more you will have to pay if the prime rate changes while you are in the process of buying a home. The current prime rate is 2.70%. If the discount is premium minus 0.65%, your rate will be 2.05% (2.70% -0.65%). Taking the same mortgage from the previous example, but at a rate of 2.05%, your monthly mortgage payments will be $ 2,129.
But if the prime rate is 3%, the discount drops to premium minus 0.35%, and you have been pre-approved for a mortgage, you still get the prime rate reduction minus 0.65% . In this case, your rate is 2.35% (3% -0.65%) and your monthly mortgage payment would increase to $ 2,203.
Unfortunately, with a variable rate mortgage, if the prime rate goes up, you will not be able to do anything about it. However, since you have been pre-approved, you will save money because the reduction has dropped to premium minus 0.35%. If you had not been pre-approved, your mortgage rate would have been 2.65% (3% -0.35%) and your monthly mortgage payment would have been $ 2,277. Over five years, this represents savings of $ 4,440.
If rates go up while you’re looking to buy a home, being pre-approved for a fixed rate mortgage will protect you from rate increases. Although obtaining a pre-approval of a variable rate mortgage will not protect you from rising rates, it will allow you to keep the discount at the prime rate in the event that the lender reduces the discount.