Mortgage Rates Detach from Related Markets as Lenders Compete for Business
Mortgage rates looked like they were doomed to rise from record breaking territory as the week was getting started. Pressure was mounting because stocks were on a four-day winning streak, the "flight to safety" in benchmark Treasuries was fading, and mortgage-backed securities prices were extremely expensive.
A flight to safety happens when investors are nervous about owning risky assets like stocks, but do not want to miss out on earning a return on their funds, so they allocate their money into risk-free U.S Treasury debt to provide a safe-haven AND an investment return. To remind readers, as benchmark Treasury yields fall, prices of mortgage-backed securities move higher, which allows lenders to offer lower mortgage rates. As Treasury yields rise, mortgage-backed security prices are led lower, which forces lenders to increase mortgage rates.
Something wasn't lining up in the mortgage world though. It seemed like we had detached (not totally) from the movements of related markets. Benchmark interest rates were moving higher, but MBS price levels and lender mortgage rate pricing strategies were holding steady. Week over week changes in consumer borrowing costs were marginal and the best 30 year fixed conventional mortgage rates never moved out of the range between 4.375% and 4.625%. We were living in our own world while lenders battled it out for loan applications.
The great thing is, when the time came for mortgage rates to react to related markets, they did. On Wednesday morning stocks sold off and Treasuries regained their "flight to safety" status. This led mortgage-backed security prices to new highs and allowed lenders to reprice for the better. Heading into the weekend, mortgage rates are priced as aggressive as they've ever been...
A well-qualified borrower, which is basically an applicant whose credit profile and loan terms do not trigger risk-based pricing adjustments (LLPAs), should be able to lock their loan between 4.375% and 4.625%. A well-qualified borrower's "best execution" mortgage rate is 4.50%. If you have the liquidity (cash) to permanently buydown your interest rate (because you expect to live in your home for longer than the time it will take to recover the points you paid at closing to buydown your mortgage rate), 4.375% is definitely out there for the taking. If you feel your credit profile is not what lenders consider perfect, which implies your loan pricing is subject to a greater amount of risk-based pricing adjustments, your mortgage rate should still be under 5.00%. This includes conventional 30 year fixed rate loans and FHA fixed rate loans.
Don't try and call a bottom in mortgage rates. When you're comfortable with your rate and closing costs, pull the trigger.