Whether you're buying a home for the first time or you've been doing it for years, one of your main goals, after finding the perfect property, should be to get the lowest mortgage rate you can. Rates can change from day to day, and knowing when to lock in the rate can save you thousands over the life of the loan.
One of the most important things to remember when looking for a mortgage is that competition is the key to getting the lowest rate. Many people who are buying their first home make the mistake of not looking around for the best mortgage. They take the first offer they get, which often means they end up with a rate that is one or two full points higher than rates for people with the same income. They think their real estate agent is there to help them make the best decision, but in reality, they are there to make money. The best advice for first-time home buyers is to keep the financial part of buying a house separate from the process of looking for a home. As a general rule, you should compare rates from at least three different companies, or more if you have the time.
Even if you've bought real estate before, you might end up paying too much in interest. The biggest trap is that you didn't lock in your rate when you could have. This is especially true when the economy is in bad shape or when the credit markets aren't sure what will happen. When your lender gives you a rate, you usually have less than 48 hours to lock it in. If you don't know if rates will go up or down after you lock them in, a good rule of thumb is to keep an eye on the 10-year Treasury note. Mortgage rates tend to follow the yield on the 10-year note more than any other short-term investment, including changes in Fed rates.
If you do decide to lock in a rate, make sure you get it in writing and that the terms are clear. If you need to go to court, oral agreements won't stand up. You and the lender are both protected from misunderstandings if the agreement is written down. You will know exactly what you are getting, how long the rate lock is good for, and what the terms are. Most of the time, you should aim for 30 to 60 days to give yourself enough time to find the right house. But 30 days is becoming more common as the rate markets keep going up and down like a roller coaster.
You could also ask about a float-down agreement, which would lock in the rate. Under this deal, if rates go up, the lender will keep your rate at the locked-in value. If rates go down, the lender will lower your rate to match. The only problem with these agreements is that they can be expensive. Depending on the size of the mortgage note, the cost of entering into one of these agreements could easily cancel out any savings you would get, unless the mortgage rate dropped by at least half a point.
The best way to get the mortgage you want on terms you can live with is to lock in the rate. It lets you worry less about changing mortgage rates and more about finding the home of your dreams.
