June 6, 2011

The Way to Protect Your Purchasing Power

Pre-approval of a mortgage has the advantage of locking in today’s low interest rates while giving homebuyers time to look around.

BY KEVIN LUTZ

It is inevitable – interest rates will eventually go up. Let’s assume that you intend to buy a house and you need a mortgage. If mortgage rates increase before you see your mortgage specialist to apply for financing, you will qualify for a lower mortgage based on your income. I have written about this before. When interest rates increase, your purchasing power decreases.

So what can you do to protect your home purchasing power in the face of increasing rates? Get pre-approved! This process provides you with an all-important interest rate guarantee should rates increase while you are shopping for a home. I suggest this even if you are just thinking about buying a new home now, because a pre-approved mortgage is absolutely free and carries no obligation to purchase. And you never know when a dream home opportunity might appear, or interest rates may increase.

Most financial institutions offer 120-day mortgage rate guarantees. How does this work? Simply put, today’s interest rate, including any discount you receive, is guaranteed for 120 days while you shop for a home. Furthermore, if interest rates go up during that time, you automatically receive the guaranteed rate you have locked in. If rates go down (before you complete your purchase) during the 120 days, you pay the lower rate. It is a win-win situation for you, courtesy of your financial institution. Keep in mind that I am using as an example the standard offer of 120 days to close on a new home purchase. Some financial institutions, RBC included, will offer rate holds for longer periods if you need more time. Also, if you are looking at a brand new home, most homebuilders have a program with a financial institution that can provide much longer rate guarantees until the completion of your new home.

For first-time homebuyers who have been timing their entry into into the housing market, or for those looking to upgrade their homes, the looming reversal in affordability may be a sign to act. With interest rates still near record lows, now more than ever, prospective homebuyers should speak to a mortgage specialist so they can feel confident about buying a home before rates increase.

Next step: Get solidly pre-approved. You will need to confirm your income, down payment and overall credit worthiness. After which, you can shop with confidence when looking at homes that are within your budget, and act quickly and confidently when you find the right home.

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