Mortgage Rates: High-Risk Event on Friday

After failing on repeated occasions to extend a two-month rally, mortgage rates took the path of least resistance last week: UP. The BestEx levee burst and the mortgage rates rose...

CURRENT MARKET*: The "Best Execution" conventional 30-year fixed mortgage rate has risen to 4.625%, but fewer lenders are readily quoting it after additional weakness was experienced today. More lenders are offering 4.75% instead (extra margin in rate sheets).  On FHA/VA 30 year fixed "Best Execution"  is still 4.375% but just barely, 4.50% is more willingly quoted.   15 year fixed conventional loans are best priced at 3.875%. Five year ARMs are still 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 (6/24):  This is as good as it's been all year. Since the middle of November really.  If you're on a short lock/float timeline (15 days), now is a good time to considering locking. While a few sessions of continued loan pricing rallies could lead to a lower overall note rate offer, we've been here before (recently) and failed to see investors commit to a sustained rally in the bond market. Our long-term outlook still supports the case for lower rates though, however until we see investors display a commitment to rally, we will be reluctant to advise floating in the short-term, especially with volatility only 2-days behind us.

THE WEEK AHEAD: With Greece seemingly saved for the summer and the Fed out of the market, new economic data, the debt-ceiling debate, and trading technicals will take the lead in providing directional guidance for interest rates. Economists have already cut forecasts considerably for 2011, but did they over-do the downgrades? Leaving too much room for upside surprises. This is a concern of ours. We still think the economic recovery is lacking core ingredients like wage-growth, consist payroll expansion over 200,00 jobs a month, and a bottom in housing, but the market is used to that by now. That's where trading technicals come into play. The main event in the week ahead will be the June "Employment Situation Report” though. Economists surveyed by Reuters believe 88,000 jobs were added to non-farm payrolls in June. The unemployment rate is expected to have risen from 8.9% to 9.1%. While anything below 200,000 new jobs a month is a drag on the economy, as evidenced by the expected uptick in the UE rate, a headline payrolls number that beats economist expectations would likely have a negative impact on interest rates.  READ MORE: HIGH-RISK EVENT AHEAD: JOBS JOBS JOBS

CURRENT GUIDANCE:   The path of least resistance is still up for interest rates, at least in the short-term. That puts us in a defensive posture for at least the next 10 to 20 days and creates an uncomfortable lock/float environment. Rate watchers have two choices: 1) lock up and get out now or 2) try to capitalize on a correction.  The former is the safe advice.  With respect to the latter, there will be ups and downs no matter which direction rates are trending.  And in the current environment, those swings can be BIG, as illustrated in this chart. For the thrill-seekers out there, or the longer-term, more flexible scenarios, we haven't change our outlook for lower rates by the end of the summer. BEWARE THOUGH: This is guidance is speculative in nature. We don't have a crystal ball, we can't predict the future, we can only share our outlook. Making the following considerations extra important........................

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?

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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.