May 8, 2020
Home loan interest rates have been on a wild ride. The Fed cut interest rates in March of 2020–two times in response to coronavirus economic issues. But the Fed rate cut did not mean mortgage loan interest rates were directly cut.
Home loan rates move up and down based on market forces, investor behavior, etc. The Fed’s rate cut actions are not a specific trim to home loan rates, but the effects of that rate cut did include influencing how investors did business in the wake of those cuts.
It’s easy to assume the Fed has some kind of direct control over home loan rates, but what is the reality? How do home loan rates work and what do you need to know moving forward with your loan application?
On Checking Home Loan Interest Rates
When you are ready to commit to a home loan, you are still subject to daily fluctuations in interest rates. If interest rates are at a hypothetical 3.50% and there is breaking news or there are economic developments that influence rates, your lender may raise the rate of the loan you want to apply for.
That’s where a mortgage loan interest rate lock commitment comes in. When you make an offer on a specific house and want to commit to the loan, you will have a conversation about the rate lock process, which protects you against fluctuations in the rates.
A rate lock is an agreement you and the lender enter with a specific time range (it is not open-ended) that anticipates a closing date.
Your interest rate is locked in and protected from increases; if rates move lower you may be able to discuss renegotiating the rate lock depending on circumstances.
On Paying Up Front To Reduce Interest Rates
Some borrowers choose to pre-pay interest or buy discount points in order to get a lower rate, which saves money over the lifetime of the lower rate.
Some are confused about whether or not they should pay for points; a good rule of thumb is to ask yourself if you plan to stay in the home long term or not. The longer you pay on your mortgage, the more those discount points could help you.
But if you don’t plan to keep the home very long, paying upfront to cut your interest rate is something that may not serve your financial needs; ask a lender to help you do the math on discount points if you aren’t sure how paying for them could change the overall cost of the mortgage loan.
The FHA Itself Does Not Touch Interest Rates On FHA Mortgages
The FHA has no control over the interest rate you are offered for your mortgage. As an agency, the FHA sets the rules for underwriting the mortgage loans. It vets its participating lenders, and insures program standards are maintained, but the FHA does not play a role in setting, regulating, or maintaining home loan rates.
The only FHA requirement in this area is that the rate you are offered on an FHA mortgage be reasonable and customary for your market and the type of mortgage.
Bruce Reichstein has spent over three decades as an experienced FHA and VA home loan mortgage banker and underwriter where he was responsible for funding “Billions” in government backed mortgage loans. He is the Managing Editor for FHANewsblog.com where he educates homeowners on the specific guidelines for obtaining FHA guaranteed home loans.
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