Published December 06, 2010
Current mortgage rates typically increase and decrease in cyclical patterns over long periods of time, generally following broader interest rate trends. But rates also make fine adjustments, ticking up or down an eighth or a fourth of a percentage point from one day to the next.
Many borrowers mistakenly believe that the Federal Reserve sets current mortgage rates. In fact, the Fed's actions have only an indirect effect on home-loan rates. Rates are more directly affected, for instance, by investor demand for securities backed by mortgages.
That means borrowers shopping for a loan need to be sensitive to short-term changes in rates. Financial news reports and a competent mortgage broker or loan officer can be good sources of timely information.
It's not just about rates
Borrowers who are shopping for a loan also should know that the rate they'll be offered depends not only on current mortgage rates but on the borrower's credit score, debt-to-income ratio, employment stability, and down payment or home equity ratio. Borrowers who pay points can "buy down" to a lower interest rate as well.
If you want to take advantage of an attractive current rate or a dip in rates, act fast and let your loan officer know that you want to reserve or "lock" a specific rate.
A rate lock holds the rate for the borrower and obligates the lender to offer that rate for a set period of time, even if rates change. That's assuming, of course, that the borrower meets the requirements to obtain the loan and that the loan closes before the rate lock expires.
Locking pros and cons
Rates can be locked between 30 and 90 days. Some borrowers lock a rate after receiving an initial loan approval. Others wait until they've found the home they want to buy. Holding off can be rewarding if current mortgage rates drop, and it can be risky if rates rise.
Borrowers who are concerned that even a small uptick in rates could hurt their ability to afford an attractive loan should lock sooner to protect themselves against interest rate fluctuations. Find out your monthly cost by entering your data into the Bankrate.com mortgage calculator.