If you're shopping for a home, you've probably already met with a lender and obtained a pre-approval letter based on your credit history, income and assets.
Hopefully, your lender also explained to you that mortgage rates fluctuate daily and from one loan program to another. If not, make sure you ask for an explanation of what changing interest rates can mean for your home loan and housing payments.
For example, if you plan to borrow $250,000 for your home purchase and want a 30-year fixed-rate loan, your monthly payments for principal and interest at 4% will be $1,194.
If your interest rate is 5%, your payments will rise by $148 to $1,342 per month. Even more importantly, you will pay an additional $53,465 in interest over the life of your loan at the higher rate.
While everyone wants to find the lowest mortgage rate, you need to understand the rate you're quoted depends on whether you're paying one or more discount points to bring down the rate. A discount point, equal to one percent of the loan amount, can bring down your interest rate by varying amounts.
When you compare mortgages, be certain that you're being quoted an interest rate based on the same number of points--or zero points.
Why Mortgage Rates Change
Mortgage rates are heavily influenced by economic trends as well as supply and demand. When other interest rates are low, mortgage rates also tend to stay low, but they can fluctuate based on employment reports, consumer confidence and, in particular, investor activity in the bond markets.
Often, bad economic news will drive investors to purchase more bonds, which sends yields lower along with mortgage rates. The Federal Reserve's decisions about interest rates also have an impact on mortgage rates.
When mortgage lenders are experiencing a period of low volume of mortgage applications, this also can send mortgage rates lower.
Try realtor.com's mortgage calculator to check what your monthly payments would be, with different interest rates, for a given loan amount. Keeping up with real estate news and trends can be helpful as well.
The rates you see online are typically reserved for those with the highest credit scores. Your individual mortgage rate will vary according to multiple factors.
Locking In Your Mortgage Rate
Your lender is the best source of advice about when to lock in your mortgage rate and what the fee is for the rate lock.
Typically, loan lock-ins are for 30 to 90 days. Technically, you can lock in your mortgage rate when you are approved for a loan, but very few buyers choose to do so--because it can be difficult to know how long it will take you to find a home and have your offer accepted.
Many borrowers choose to lock in the loan rate when they have a ratified contract, because at that time you'll have a better feel for when the settlement will take place.
However, if mortgage rates appear to be rising quickly, you should discuss with your lender locking in a lower rate as soon as possible. Your lender can tell you what the fee is for the loan lock and what will happen if interest rates drop while your loan is locked.
Some lenders offer a "float-down" if rates decline during the lock-in period. If the lock expires before you close on your loan, you may be able to extend the lock or you will have to relock the loan at current mortgage rates.
When you're shopping for a home, it's best to stay aware of mortgage trends and in close touch with your lender.