Why a pre-approval matters when rates are moving
If you're planning to search for and buy a home in the coming months, rising interest rates might have you thinking it's time to move. Many experts recommend meeting with your mortgage broker or financial institution to get a mortgage pre-approval — and with good reason.
A pre-approval letter gives you several advantages. It can protect your interest rate, and it shows sellers you're a qualified, motivated buyer. In a seller's market, every edge helps when you're trying to close on your dream home.
What a mortgage pre-approval actually gives you
With a mortgage pre-approval in hand, you'll see how much a lender is willing to give you toward a home purchase. That helps you set expectations and a budget while you shop. It's also a smart move to have before you make an offer.
The pre-approval shows you:
• The maximum amount you can borrow • Estimated monthly payments • The interest rate for your mortgage
Although it varies from lender to lender, once you get a pre-approval the interest rate is usually locked in for 90 to 120 days. That's a real advantage if rates are climbing. On the other hand, if rates start to decline, you can negotiate a better rate just before you close.
Note that interest rate locks don't necessarily apply to variable-rate mortgages. That's because they're determined by national rates and indices that can change.
Should you get a pre-approval for a variable-rate mortgage?
It's still worthwhile to get a pre-approval even if you're looking at a variable rate mortgage. Variable-rate mortgages are based on the lender's prime rate. When you lock in that rate, you protect yourself from changes that happen during the pre-approval period. Your pre-approval locks in today's discount rate no matter what happens to the prime during those 90 to 120 days.
Can you get a variable rate mortgage with fixed payments?
Ask your lender if they offer fixed payments on variable-rate mortgages. This option lets you lock in a consistent monthly payment. Keep in mind, though, that if interest rates increase, the amount of principal you pay each month will decrease as more of the payment goes toward the interest.
What a pre-approval does for you
There are several benefits to getting a mortgage pre-approval:
• You have protection. If you want to guard against rising rates, a pre-approval makes total sense. • You know your borrowing power. That lets you set a budget and look for homes in your price range. It also helps you decide whether you're ready to buy. Many prospective homeowners use this time to save money for a down payment or to ask family members to contribute to a larger down payment.
In many cases, a pre-approval is a big step. After the lender checks your credit and goes through your documents, they may guarantee the amount and interest rate on the pre-approval. Ask your lender or mortgage broker to walk you through the specifics of the pre-approval and how solid the offer really is.
Getting your pre-approval won't hurt your credit. Instead, it helps you get your finances in order so you can get a mortgage. If you're ready to begin your home search, a pre-approval can answer many questions about how you'll pay for it — and protect you from rate moves while you shop.
