Mortgage Rates: Stored Energy Released!

After being stuck in the same spot for over a month, home loan borrowing costs shot higher today at their most violent pace since early February. Best-Execution mortgage rates moved up in the process.

This is the eventuality to which we've been referring with comments such as: "The risks associated with this range go back to the concept of "stored energy" in the bond market.  Think of it this way: the longer the market stays in limbo,  the faster rates will travel when the levee breaks and stored energy is released. That means if you are floating when stored energy is released, you are running the risk of losing your current quote."

To see just how much costs moved today relative to recent offerings, take a look at the chart we normally post each Friday.  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 before spiking today.

The spike is pretty obvious....

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

UPDATED CURRENT MARKET: The "Best Execution" conventional 30-year fixed mortgage rate MOVED HIGHER to 5.125% today after an extended period at 4.875%.  For those looking to permanently buy down their rate to 5.00%, this quote carries higher closing costs but  the upfront fee to permanently buy down your rate  to 5.00% is 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 5years.  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 now best priced at 4.25%. Five year ARMS are stratified and there is more variation in what will be "Best-Execution" depending on your scenario.  We recommend break-even-analysis for several potential rates.

PREVIOUS GUIDANCE:  Even though borrowing costs moved more than average today, we're still in a sideways range.  The longer we go without getting a clear sense of market direction, the higher the risks involved in floating.  It's not that a longer waiting period automatically pressures rates higher, it just means the longer rates stay sideways, the more energy they store for their next movement up OR down.  Our guidance is unchanged: If you can't afford or don't want to take a risk, lock now because it might not get any better from CURRENT MARKET again.  If you've got time, flexibility, or otherwise are not in any particular rush or pressing need to lock your loan, we still think it's possible that rates make one more run lower in the months ahead. 

CURRENT GUIDANCE: Today's move in the Best-Execution rate could be a brief foray into unpleasant territory or merely the first day of a new trend of higher rates.  Though there's no way to know for sure if economic data or news headlines will show up any time soon to ease the pain, the possibility that they WON'T is enough for us to suggest the following: Until further notice, your decision to lock or float should assume that rates will get worse before they get better, if they get better.  Believe it or not, we are STILL able to conceive of a rates rally if the underlying bond markets are able to hold their ground at some important nearby levels.  We'll let you know if they do and point you in the direction of more detailed analysis if you want it, but for now, it's fair to say the lock bias has ticked up a notch in intensity.

One VERY IMPORTANT CAVEAT to any conversation about "Best-Execution" mortgage rates: Pricing is much more stratified than normal right now due to the recent changes in Loan-Officer Compensation. Because of this, the Best-Execution rate can vary greatly from lender to lender, and we advise doing a break-even-analysis on several available rates.

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 bond 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.