Mortgage rates have been near historic lows essentially since the start of the coronavirus pandemic, but they’ve been trending mostly upward in 2021.

That trend will affect current homeowners, prospective refinancers and potential homebuyers differently, so it’s important to understand how mortgage interest rates work and what changes in the market mean for you.

As rates go up, will my existing mortgage payment change?

Most likely not.

The most common mortgages for current homeowners are 15- and 30-year fixed-rate loans. Any loan with a fixed interest rate will have steady, predictable principal and interest payments throughout its term. If you have an adjustable-rate mortgage, however, your payment could be going up — though ARMs usually rest only once a year and have limits on how much the rate can change.

“In most cases, homeowners with fixed mortgage rates do not need to be concerned about rising rates,” said Lauren Anastasio, a certified financial planner at SoFi. “If however, you have an adjustable rate mortgage, also referred to as an ARM, rising rates could mean that your monthly payment could increase for you in the future.”

A Bankrate survey last year showed that some homeowners aren’t very familiar with their own mortgage terms, so in that case it’s a good idea to get in touch with your lender and make sure you know what your current rate is, and whether the interest is fixed or adjustable.

Is now a good time to refinance my mortgage?

As interest rates rise, fewer homeowners will stand to benefit from a mortgage refinance, so it’s a good idea to consider updating your loan while you can still maximize your savings.

“It’s still very possible for homeowners who have not already refinanced to save money by doing so. How much exactly a homeowner has to gain from this process will depend on their existing rate, the new rate they qualify for, and the type of mortgage they decide to take out,” Anastasio said. “Refinancing can give you a lower rate, and a lower monthly payment, but it can also extend the life of your loan. Make sure you evaluate your long-term goals before jumping into a costly refinance process.”

If you have an adjustable-rate mortgage, you’ll still want to crunch the numbers and think about your housing goals before jumping into a refi. Rising rates can mean more expensive monthly payments, but they may not always outweigh the cost and hassle of a refinance.

“Make sure you do a break-even analysis and evaluate whether the cost of refinancing will be recouped before you’d move on from your current home. Many buyers who take out an ARM are ones who are not planning on staying in their property long-term.” Anastasio said. “If however you have an ARM and are planning to keep your property long-term, or have been waiting for the opportunity to switch to a fixed-rate mortgage, you’ll want to do so when rates are low as they are now.”

How do I know when to lock in a mortgage?

As with other kinds of investments, timing the mortgage market can be tough. Mortgage lenders update their rate offerings as often as once a day, so changes tend to be priced in pretty quickly. Even so, it’s best not to worry too much about what the market is doing, and just figure out if a rate you’re quoted seems like a good deal to you in your personal financial situation.

“Everyone in the  market to refinance has different variables to consider when deciding to move forward — their existing rate, the amount they owe, how far they are into their current mortgage, the new rate they qualify for, etc. and because of all of these variables when it is worthwhile to move forward versus when it doesn’t make sense is different for everyone,” Anastasio said. “If you want to roll the dice and hold off on locking in a rate because you think they’ll go down, just be prepared that the opposite might happen.”

In a market where rates could fall, a float-down mortgage lock could be a great option for many homeowners. This tool means you have a guaranteed maximum rate, but it could go lower before you close if the market dictates such a move.

Anastasio gave three key tips for anyone considering a float-down clause in their mortgage lock:

  1. This option typically comes at a cost. Many lenders will charge a fee for this type of rate-lock option, and you pay that fee regardless of whether your rate changes during your lock period.
  2. There is usually a minimum amount that rates would need to move in order to be eligible. For example, a lender may say that rates need to fall at least .25% on a particular loan product in order to float down the rate, so even if rates go down, and let’s say the mortgage rate is now .125% lower than where you locked, you will still get your higher initial rate.
  3. Lenders are not obligated to keep you in the loop on rates. If you ask for this rate-lock option, you are responsible for watching rates and then reaching out to the lender if you believe that rates have gone down enough to qualify for the float-down. If you’re not paying close enough attention every day, you could miss your opportunity.

Bottom line

With mortgage rates trending upward, it can be a confusing time for homeowners and prospective homebuyers. You could still save with a refinance if you haven’t updated your loan recently, and you’re likely to get a historically good deal if you’re opening a new mortgage.

Keep in mind, every borrower’s situation is slightly different, so at the end of the day, you really just need to figure out if the loan terms you’re being offered are right for you.

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