Mortgage Rates: Rally Takes a Breather

By: • Tue, Jun 7 2011, 6:05 PM

Mortgage rate watchers were reminded once again today of the threats they face when floating a loan on a shortened timeline.

Although consumer rate quotes were able to recover from early morning weakness, just like they did yesterday, home loan borrowing costs have failed to make positive progress since "The Wall" came crashing down last Friday. The positive big picture tone in the bond market has been put on pause. We believe this stubborn behavior is factor of "debt auction concessions".

CURRENT MARKET: The "Best Execution" conventional 30-year fixed mortgage rate is 4.50%. In some cases, 4.375% can make sense, but will involve increased closing costs in the form of origination fees. 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 4.25%. 15 year fixed conventional loans are best priced at 3.75%. Five year ARMs are best priced at 3.125% but the ARM market is more stratified and there is more variation in what will be "Best-Execution" depending on your individual scenario.

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PREVIOUS GUIDANCE: With "The Wall" now torn down a path has been paved for mortgage rates to continue on the path toward more improvements. An extended rally will not come without setbacks though. Short-term corrections are to be expected along the way. That means borrowers working on a shorter lock/float timeline should remain defensive. Your main goal is to protect new, lower rate quotes from short-term market fluctuations. This guidance has already proven accurate as borrowing costs rose slightly today, driven by a "pre-auction price concession" ahead of tomorrow's 3-year debt auction. Although loan pricing did in fact deteriorate, the overall bullish trend is still very much in tact. Intermediate to longer-term scenarios are more than justified in floating. READ MORE: What's an auction concession?

CURRENT GUIDANCE: With "The Wall" now torn down a path has been paved for mortgage rates to continue on the path toward more improvements. An extended rally will not come without setbacks though. Short-term corrections are to be expected along the way. That means borrowers working on a shorter lock/float timeline should remain defensive. Your main goal is to protect new, lower rate quotes from short-term market fluctuations. The overall bullish trend is still very much in tact though. Intermediate to longer-term scenarios are more than justified in floating. READ MORE: The Day Ahead

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 ot rally as fast as you want/need.
   3. HOW DO YOU HANDLE STRESS? Are you ready to make tough decisions?

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"Best Execution" is the most cost 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.