Mortgage Rates: Still Stuck But Lender Credits Likely

By: Matthew Graham • Tue, Mar 15 2011, 6:13 PM

Home loan borrowing costs improved again today, but Best Execution mortgage rates were unchanged.

Nervous tensions surrounding the potential economic impact of the earthquake in Japan sent a shock-wave through global markets. U.S. stocks suffered and as is often the case during equity sell-offs, bond markets benefited, including those that directly influence mortgage rates.

If that sounds familiar, it's because we wrote it yesterday! And it still applies...

Although the "flight-to-safety" was much more pronounced today, the net effect was only a modest reduction in consumer borrowing costs. Best execution mortgage rates are still stuck.

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.

See Rates from Lenders in Your Area

CURRENT MARKET: The "Best Execution" conventional 30 year fixed mortgage rate is still 4.875%. For those looking to permanently 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 only advise the permanent floatdown if you plan to keep your new mortgage outstanding for longer than the next 10 years. There are some lenders offering competitive closing costs on 4.75%, but those instances are few and far between. 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 at 4.125%. Five year ARMS are still best priced at 3.50%.

NOTE: Although Best Execution rates did not improve today, the closing costs associated with these quotes did decline. With the exception of conventional 15-year loans, borrowers who meet the requirements in the disclaimer below should receive closing cost help from their lender on Best Execution quotes.

PREVIOUS GUIDANCE: The gains seen are STILL not enough to consider mortgage rates "UNSTUCK". So with a high-risk event ahead (Federal Reserve meeting tomorrow) and densely packed economic calendar in the middle of this week, we see no reason to change our current guidance. Our willingness to consider a long term rate recovery is the same, but there are many reasons to remain defensive of the positive progress that has helped rates move to one-month lows. While it's true that rates can move either direction, they can get worse much faster than they can get better right now.

CURRENT GUIDANCE: Although early trading seemed to suggest mortgage rates were in the process of becoming "UNSTUCK," an unfriendly correction ensued in the afternoon hours that led to losses which suggest bond markets are still not committed to a sustained rally. Yet. This leaves us very much on a fence. Our intermediate outlook is for lower rates but short term decision makers must consider that mortgage rates are as aggressive as they've been all year.

Plain and Simple: We're going to need a sustained bond market rally to see "Best Execution" break through the 4.875% barrier. Otherwise this is as good as it gets.

"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.