Mortgage Rates: Near One-Month Lows

Mortgage rates benefited from a "flight to safety" this week.

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 government guaranteed U.S Treasury debt to provide a safe-haven AND an investment return. As benchmark Treasury yields fall on "flight to safety" buyer demand, prices of mortgage-backed securities move higher in unison. This allows lenders to reprice their rate sheets for the better and gives originators an opportunity to offer fence-sitting borrowers lower mortgage rates or more competitive closing costs.

Conflict in Libya and the potential for a spillover into other oil producing countries has energy traders nervous about shrinking oil inventories. The chance for a supply/demand driven spike in energy prices is seen as a threat to the already sensitive U.S. economic recovery.  Many economists believe rising energy costs would squeeze disposable income on Main Street and hurt consumer spending, which would slow the economic recovery.  This "headline risk" pushed stock prices lower and moved money into safe haven assets like U.S. Treasuries and mortgage-backed securities. This ultimately led the Best Execution 30 year fixed mortgage rate lower not once but twice this week.

CURRENT MARKET: The "Best Execution" conventional 30 year fixed mortgage rate has fallen to 4.875%.  For those looking to buy down their rate to 4.75%, this quote carries higher closing costs. The upfront cost of permanently buying down your rate  to 4.75% is not worth it to many applicants. We would generally advise the permanent floatdown if you plan to hold your new mortgage for longer than the next 10 years.  Ask your loan officer to run a breakeven analysis on any origination points they might require to cover permanent float down fees. On FHA/VA 30 year fixed "Best Execution" is still 4.75%. 15 year fixed conventional loans are best priced between 4.125% and 4.25%, but 4.25% is more efficient in terms of the floatdown breakeven cost. Five year ARMS are best priced at 3.625%.

To illustrate the recent behavior of mortgage rates, we offer the chart below. It graphs the average origination closing costs associated with specific mortgage note rates as quoted by the five major mortgage lenders.

If the note rate line is moving up, the closing costs associated with that rate quote are rising. In December, closing costs rose rapidly. Mortgage rates did improve from those levels, but then moved sideways for 7-weeks. And then the range broke following the January Employment Situation Report and consumer rate quotes rose back to their December highs. As you can tell, borrowing costs have steadily improved since then.....

Each line represents a different 30 year fixed mortgage note rate.  The numbers on the right vertical axis are the origination closing costs, as a percentage of your loan amount, that a borrower would be required to pay in order to close on that note rate. If the note rate graph line is below the 0.00% marker, the consumer may potentially receive closing cost help from their lender in the form of a lender credits. If the note rate line is above the 0.00% marker, the consumer should expect to pay additional points at the closing table to cover permanent buydown costs and origination fees. PLEASE SEE OUR MORTGAGE RATE DISCLAIMER BELOW

PREVIOUS GUIDANCE:   The bond market is still in limbo in terms of an extension of the recent rally. Approach floating from a defensive posture, especially after Best Execution improved to 4.875% today because we think it's going to take a sustained rally in the bond market for Best Execution to improve to 4.75%. 

NEW GUIDANCE:  No real change. The bond market is still in limbo in terms of an extension of the recent rally. Approach floating from a defensive posture, especially after Best Execution improved to 4.875% this week because it's going to take a sustained rally in the bond market before Best Execution reaches 4.75%. That means current market is likely as good as it gets for at least the next week. If you don't have more than a week to float your loan, you should be locking very soon. As you can see in the chart above, it's been almost a month since rates were this aggressive. And we wouldn't be surprised one bit if the market pushes back against the recent mortgage rates rally next week. Profit taking is a naturally occurring event whenever interest rates move lower. READ MORE: IN-DEPTH BOND MARKET BREAKDOWN

What MUST be considered BEFORE one thinks about capitalizing on a rates recovery?

   1. WHAT DO YOU NEED? Rates might not recover as much as you want/need.
   2. WHEN DO YOU NEED IT BY? Rates might not recover as fast as you want/need.
   3. HOW DO YOU HANDLE STRESS? Are you ready for MORE VOLATILITY in the secondary mortgage market?

"Best Execution" is the most efficient combination of note rate offered 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%.  When deciding on whether or not to pay points, the borrower must have an idea of how long they intend to keep their mortgage. For more info, ask you originator to explain the findings of their "breakeven analysis" on your permanent rate buydown costs.

Important Mortgage Rate Disclaimer: The "Best Execution" loan pricing quotes shared above are generally seen as the more aggressive side of the primary mortgage market. 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. Don't forget the intense fiscal frisking that comes along with the underwriting process