Tuesday, November 16, 2010

The Value of A Rate Hold

Securing a rate hold is like having insurance on your mortgage rate – you no longer have to worry about mortgage rates increasing while you find your new home over the next 90-120 days. And if rates drop within that same period, so too will your pre-approved rate.

For instance, if you obtain a 3.75% rate hold and then global risks subside and the economy strongly recovers over the next three to four months, that 3.75% could easily jump to 4.50% or higher. In this case, your rate hold for 3.75% would have saved you three-quarters of a percentage point, which would translate to a savings of a significant amount of money over the term of your mortgage.

But a rate hold means nothing if you don’t meet the lender’s qualifications. By working with a mortgage professional or lender to obtain a pre-approval and a rate hold, you can be confident you have access to mortgage financing and you will know how much you can spend before you head out shopping for a property.

It’s important to note, however, that there is a significant difference between being pre-approved and pre-qualified. In order to obtain a pre-approval, the lender fully underwrites the deal, whereas with a pre-qualification only the most basic details are considered. Remember that many banks will only issue a pre-qualification.

There are several reasons why you may want to secure a rate hold, including when you:

• Are thinking of buying a home in the next few months

• Are considering locking in your variable rate to a five-year fixed if rates rise, but your lender won’t hold a good rate for you

• Are casually thinking of refinancing but prefer to wait for fixed rates to rise so that your interest rate differential (IRD) penalty falls

You want to hold a rate on a different term than you were pre-approved for by a different lender

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