Fixed-rate mortgages can provide some great deals but there’s often details to watch out for with these rates, especially when it comes to the subject of rate-drops. In this blog we’ll explain and bit about rate-drops and what to look out for when choosing your fixed-rate mortgage.
It is not uncommon for rates to drop between the time you apply and close on a mortgage. Like the retail world, “price protection” or more accurately “rate protection” can be available to buyers, but this not always the case.
As a Mortgage Professional, I make it my responsibility to explain the lender’s rate-drop policy before my clients sign their applications. Every lender has different policies and it’s important that your Mortgage Broker explains this to you both conceptually and with specific reference to your case before you commit to the rate. Here’s how it works:
How do rate drops work?
When your fixed-rate mortgage application is approved by your lender, and their best fixed-rate drops before you close the deal, you’ll no doubt feel that you’re entitled to that improved deal. However, this is not always the case, and the policies of various lenders can differ greatly.
For example, some lenders may draw the line at one rate drop and no more, whereas others may allow multiple. Alternatively, there may be a time scale specified by the lender that distinguishes when you are entitled to a dropped rate – this could be a week before you close the deal, or even right up until the last day.
The process of rate lowering can differ too. Certain lenders will automatically lower your rate, whereas others may require your mortgage broker to actively request the latest lowered rate.
Which type of lender is best?
If you can find one, a lender with a “look back” policy is ideal. At the time of closing, these lenders will “look back” over the time frame since you applied and give you the best rate available during that period. For regular mortgage hunters, these lenders can be difficult to find but with the help of a professional mortgage broker, you’ll have no problem getting set up with a “look back” policy.
What about no-float-down rates?
You may have heard of lenders with “no-float-down” clauses attached to their fixed-rate mortgages. What does this mean? This is a clause that can really restrict your fixed-rate mortgage as it means your rate cannot be lowered if your lender begins to offer a better rate. Only new clients are entitled to these new and lower rates.
Lenders sometimes have these terms because of the insurance costs they incur when giving you a fixed rate. This allows the rates to drastically increase in the future without the lender losing out big time. However, due to the competitiveness of the mortgage rate market, these types of fixed-rate mortgage are becoming less common.
Are rate-drops always important?
If fixed mortgage rates are rising, or at least are fairly steady, then there’s less harm in settling for a mortgage with a “no-float-down” clause. However, if rates are going the other way then having the option to secure a lower rate is crucial. If you have any doubts then your mortgage broker will be able to explain to you the full the advantages and disadvantages of choosing a particular rate.
Bottom Line: If you’re considering going for a fixed-rate mortgage it’s essential that you do your homework. While in the right circumstances having a look-back or a no-float-down rate may make little difference, it is something that you should fully understand before applying for your chosen rate. Without knowing the ins and outs of your fixed-rate policy you may end being disappointed when you see new customers walking away with far superior rates to yours. The variety of different rate-drop policies shown by lenders once again highlights the importance of using a professional mortgage broker. Your broker will explain all the details of your chosen rate and will be able to give you an honest assessment of whether or not it is the best rate for you.
For more information on how rate-drops are handled in fixed-rate mortgages, contact Calgary mortgage broker Tim Lacroix on (403) 648-1541.
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