Mortgage Rates: Illustrating the Wall

By: • Mon, May 23 2011, 4:09 PM

Home loan borrowing costs continue to hover near six month lows. Continued improvements have however been hard to come by since the recent rally hit a wall. We've entered a period of stagnation.

Sideways behavior is apparent in the chart below of Consumer Rate Quotes. If the line is moving up, origination costs are rising for the particular note rate offer. If the line is moving down, costs are getting cheaper.

The chart above compares the average origination costs (as a percentage of loan amount) for several available mortgage note rates as quoted by the five major lenders. 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

See Rates from Lenders in Your Area

CURRENT MARKET: The "Best Execution" conventional 30-year fixed mortgage rate is still in a state of flux between 4.75% and 4.625%. Some lenders are already quoting C30 loans at 4.625% with no origination points. If you are looking to move down from there or merely between the two, you'll be assessing the trade-offs between higher closing costs and lower monthly payments. This could be worth it to applicants who plan to keep their new mortgage outstanding for long enough to breakeven on the extra upfront costs. On FHA/VA 30 year fixed "Best Execution" is also a moving target roughly centered on 4.375% with adjacent rates (even 4.25%) being logical in some scenarios. 4.50% is a no-brainer for most FHA 30YR fixed scenarios. 15 year fixed conventional loans are best priced at 3.875%. Five year ARMs are best priced at 3.25% but the ARM market is more stratified and there is more variation in what will be "Best-Execution" depending on your individual scenario.

PREVIOUS GUIDANCE: We really didn't get much by way of new guidance today, having landed very much within the boundaries we travelled this week. One thing is clear though, underlying bond markets have yet to break through strong technical resistance, and until/unless they do, we remain wary of a potential short term pull-back. Certainly, if you are being quoted a below "Current Market" Best-Ex rate, your goal should be keeping it. Floating remains an option for longer term rate-watchers and intermediate-term scenarios.

CURRENT GUIDANCE: Our previous guidance was timely and remains applicable today. Floating is still an option for borrowers who have a longer lock/float timeline as well intermediate-term scenarios. Borrowers with a 10-15 day lock/float timeline should be more defensive of recent rate improvements, especially if lenders are quoting the lower of our "Current Market" Best-Ex pairs. Although it wouldn't take a big move in the secondary market to see Best-Ex quotes fall another 0.125%, that move has failed to occur in the past 10 days. The rally has gone sideways, that skews risk unfavorably in the short term. This will continue to be the case until "The Wall" comes tumbling down or proves unbreakable.

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

   1. WHAT DO YOU NEED? Rates might not rally as much as you want/need.
   2. WHEN DO YOU NEED IT BY? Rates might not rally as fast as you want/need.
   3. HOW DO YOU HANDLE STRESS? Are you ready to make tough decisions?

ECON EVENTS CALENDAR: THE WEEK AHEAD

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*"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 buy down 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 fiscal frisking that comes along with the underwriting process.