Mortgage Rates: Understanding the Risks

By: Matthew Graham • Wed, Jul 6 2011, 3:20 PM

Today brought a second day of mild recovery for mortgage rates.

Last week, the Current Market Best-Execution mortgage rate rose somewhat abruptly after repeatedly failing to improve (READ MORE). Although today's improvements don't bring the Best-Ex rate back to previous levels, they have helped lender-related closing costs move a bit lower than yesterday.

CURRENT MARKET*: The "Best Execution" conventional 30-year fixed mortgage rate has risen to 4.625%, but fewer lenders are readily quoting. 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.

See Rates from Lenders in Your Area

PREVIOUS 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 changed our outlook for lower rates by the end of the summer. BEWARE THOUGH: This guidance is speculative in nature. We don't have a crystal ball, we can't predict the future, and we can only share our outlook.

CURRENT GUIDANCE: Anything we can offer today by way of guidance is predicated on the uncertainty of how rates will move after Friday's Jobs report (certainly read our post on it if you haven't already: HIGH-RISK EVENT AHEAD: JOBS JOBS JOBS). But beyond that, the best insight we could share today is that although there's one more day to go between now and then, it's nearly impossible that the Best-Ex rate will improve tomorrow. That being the case, your decision process is clarified. Either you're going to lock ahead of the jobs report or you're not. If the report sends rates lower, they're going to inch down slowly enough that you might be waiting another few days for borrowing costs to improve enough to bump Best-Ex Rates to the next notch down. If, however, rates rise on Friday, damage can be much quicker and more severe. Of course these hugely influential reports can sometimes be so near the middle ground of the market's expectations that rates won't move much in either direction, but as long as you understand the risks laid out above, you're equipped to decide what works best for you. Most scenarios would be better off locking today or tomorrow purely based on risks and probabilities.

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.