Mortgage Rates: High Risk Event Behind Us. Borrowing Costs Improve

By: Matthew Graham • Mon, Jan 10 2011, 6:25 PM

Mortgage rates were generally slightly improved today versus Friday today. The employment data that has been so prevalent in our discussions of late has come and gone. For those who either did not or could not lock in their loan pricing before then, potentially painful bullets have been dodged. Now that Monday has also come and gone and changed very little about Friday's improvements, we get the sense that the market is starting this new monthly cycle approximately where it wants to be.

That statement felt doubly true today as the market moved very little thus providing lenders with little guidance as to passing on improvements in rate sheets. Despite the indecisive day in the markets, by day's end, the gains were enough for several lenders to offer improved pricing over Friday.

It's important to note the distinction between LOAN PRICING and actual INTEREST RATES. For most scenarios, there was not enough improvement today for the actual interest rate on your prospective mortgage to go down, at least not without some sort of increased cost. Nevertheless, LOAN PRICING did improve, meaning that the costs associated with obtaining your current rate did improve modestly.

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Plain and Simple: The actual costs associated with your current mortgage rate quote moved slightly lower today, but we're still dealing with the SAME BEST EXECUTION RATES!

4.875% is still the most common "Best Execution" rate for very well-qualified borrowers seeking a conventional 30 year fixed home loan, but at certain lenders, the "sweet spot" is 4.75%. Those two rates account for a majority of lenders' best execution levels, though outliers exist. 4.75% is best execution on FHA/VA 30 year fixed loans (big gaps to 4.625 on FHA/VA loans!).

Important Mortgage Rate Disclaimer: "Bext Execution" is the most efficient combination of note rate and points paid at closing. This note rate is determined based on the time it takes to recover the points you paid at closing (discount) vs. the monthly savings of permanently buying down your mortgage rate by 0.125%. Loan originators will only be able to offer these rates on conforming loan amounts to very well-qualified borrowers who have a middle FICO score over 740 and enough equity in their home to qualify for a refinance or a large enough savings to cover their down payment and closing costs. If the terms of your loan trigger any risk-based loan level pricing adjustments (LLPAs), your rate quote will be higher. If you do not fall into the "perfect borrower" category, make sure you ask your loan originator for an explanation of the characteristics that make your loan more expensive. "No point" loan doesn't mean "no cost" loan. The best 30 year fixed conventional/FHA/VA mortgage rates still include closing costs such as: third party fees + title charges + transfer and recording.

Starting tomorrow, markets will digest the first of three treasury auctions, which occur at 1pm starting tomorrow and ending on Thursday. Though there are other economic events that may impact mortagage rates, these auctions are the best candidate to move rates in one direction or another this week. Remember though: treasury yields DO NOT directly dictate mortgage rates, but they are one of the most important BENCHMARKS used in determining the value of a Mortgage-Backed-Security (MBS). And guess what! "Value of MBS" is just a fancy, complicated way to say MORTAGE RATES. So if big things happen in the treasury market, although it isn't always a direct relationship, it is common to see MBS react.

Bottom line is this: although we are successfully out of the woods with respect to the high-risk event of Friday's employment data, we're not "risk-free" going forward. We are encouraged about the prospects for mortgage rates to improve, but we're literally operating on a day by day basis. Waiting for news and events to dictate directionality in the bond market. It can help us or hurt us, so please continue to operate on that same principle of weighing your options with the knowledge that they could rapidly change for the better or the worse.