What Are Interest Rate Holds and How Do They Work?
The interest rate on your mortgage has a big effect on your monthly payment. Naturally, you want to get the lowest rate possible. Since it can take some time to finalize the sale of the home – especially when you’re building a home instead of buying a resale home – it’s normal to worry about what rate you’ll end up with. Will interest rates go up while you’re shopping? If so, will you still be able to afford the home that you want?
One way to ease your stress is with a rate hold. It’s exactly what it sounds like: banks hold the rate for you for a certain period of time. The good news is that rate holds are low commitment. You get to lock in that rate, but if rates go down, you can easily get a better rate.
However, there are a few different things that you need to understand when you’re using interest rate holds. Keep reading to learn what they are so you can lock in at a rate you’re comfortable with and enjoy a smooth home buying process.
Banks vs. Brokers
You can get rate holds through a bank directly or through a mortgage broker. If you’ve already decided on a bank that you want to use, go ahead and get the hold through them. Going through a mortgage broker can offer you more options though.
Since brokers work with several different banks, they have the option of creating rate holds with different banks. This means they can hold today’s lowest rate with one bank, then compare rates at other banks tomorrow. If there’s a lower rate tomorrow, they’ll be able to hold that rate with that bank. You may get a better deal this way.
Rate Holds vs. Pre-Approval
It’s very important to note that a rate hold is not the same as a mortgage pre-approval. When a lender holds the rate for you, they are not approving you for a mortgage. They’re just holding the rate. They have not looked deeply into your finances, and once they do, you may not qualify for a mortgage with this company, or you may not qualify for a mortgage at that rate.
This is why you need to be extremely careful in getting a “rate hold.”
On the other hand, when you get pre-approved for a mortgage with a lender, they’re checking into your finances. You have to submit tax forms and pay stubs, and they’ll pull a credit report on you. Using all of this detailed information, they’ll make an offer.
At this time, they’ll hold that mortgage rate for you, but they’re also guaranteeing to lend you the money… as long as there are no major changes to your financial situation in between now and the time you finalize the mortgage. Pre-approval is more time consuming, but it’s the safer way to go.
Rate Hold Terms
Each rate hold or mortgage pre-approval is going to have a specific term, and you need to understand what this term is. Most of the time, the hold is for around 120 days. However, the hold may be for only 30, 60, or 90 days. If you got your rate hold through a mortgage broker, there’s a chance that the different holds they placed have different terms. Ask if you’re not sure.
Once the hold is up, you may need to apply for a rate hold again. Your rate hold will then be based on whatever the current rates are. This may work out in your favour.
Rate Holds and New Construction
We just mentioned that most rate holds are good for 120 days. Four months is usually enough time for someone purchasing a resale home. That gives you enough time to look for options, make an offer, and handle all the paperwork associated with getting the mortgage for that particular home.
If you’re purchasing a new construction home, you may worry that you need more than four months. Most new construction homes take anywhere from nine months to a year to build from the ground up. However, mortgage funding on new construction homes tends to come in stages.
You’ll need to start to take out your new mortgage before the builder will start construction on your home. New construction mortgages are a little different than other mortgages, so it’s a smart idea to work with a builder’s preferred lender. They’ll be able to answer any questions you might have.
Getting an interest rate hold is a good way to shop with confidence because you’ll know that you’re getting a good rate. When doing this, though, it’s important to go in with an understanding of what you’re agreeing to with the bank. If you’re not getting pre-approved by the bank, you’re not guaranteed to get the rate when you need your mortgage.