Mortgage Rates: Unfriendly Shift Potentially in Process

Home loan borrowing costs moved incrementally higher this week. There is reason to be concerned about this directional drift....

Although today's increased costs are not out of line with the rest of the week, the broader bond market is potentially undergoing a technical shift.  It hasn't been noticeable from a primary mortgage market perspective because borrowing costs have slowly drifted higher with little motivation over the past week, but thin margins are adding up and we're getting more nervous about a technical shift in the secondary market that could lead to an unfriendly jump in "Best Execution" mortgage rates.

Plain and Simple: Mortgage rates have been drifting sort of listlessly in the wrong direction for the past week. Trading technicals suggest "listless" may now be changing to "purposeful."

CURRENT MARKET: The "Best Execution" conventional 30-year fixed mortgage rate is 4.875% after falling to 4.75% briefly last Wednesday (not universally, but in some cases).  For those looking to permanently buy down their rate to 4.75%, this quote carries higher closing costs. The upfront fee to permanently buy down your rate  to 4.75% is not worth it to every applicant, we would generally only advise the permanent floatdown if you plan to keep your new mortgage outstanding 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 back to 4.75%. 15 year fixed conventional loans are best priced at 4.125%. Five year ARMS are best priced at 3.50%, but there is much more stratification in this sector with higher or lower rates making equally as much sense depending on the lender and on the amount of time you intend to keep the loan.

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 one can see, borrowing costs have steadily improved afterward before running into a wall near the lows of the year.  Since then borrowing costs have slowly drifted higher.

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: No change to our recent stance that favors locking for short term/sensitive outlooks and allows for longer term/less urgent outlooks to wait for an additional recovery in mortgage rates. Tomorrow should be a busier session than today as it contains even more economic data. The bond market that indirectly affects mortgage rates moved to the edge of its recent range today, meaning it is now closer to a shift higher in interest rates. We don't want to freak anyone out because Best-Ex mortgage rates have some cushion to work with, but we do caution, if you are being quoted a below "CURRENT MARKET" mortgage rate...you are in danger of losing that quote if this "directional drift" heads much further in the wrong direction. Our concerns are technical in nature.

CURRENT GUIDANCE:  The opening lines in tonight's post should hint at the guidance that follows.  Something dangerous to consider: if you were just following along with mortgage rates or closing costs, today might not have looked any different from previous days this week.  Best-execution stayed the same, and costs increased at a similar pace.  But this only occurred because the securities traded in the secondary mortgage market have traded better and better versus their guidance givers in the Treasury market.  But they DO NOT have an unlimited ability to outperform, and any further weakening in Treasuries will be a drag on the mortgage market next week, bringing costs higher and possibly even the best-execution rate.  There are events that can reverse this alarming trend, but if that doesn't happen, the penalty for waiting too long to lock may be a lot less tolerable next week. 

"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.

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.