Mortgage Rates: Risk of Floating on the Rise

Home loan borrowing costs had reached their best levels of the week as of yesterday afternoon, but were unable to improve further today.  That leaves the Best-Execution rate decidedly unchanged and bumps costs back up closer to their mid-point of the week, increasing the level of risk heading into tomorrow when several economic reports will be released.

CURRENT MARKET*: The "Best Execution" conventional 30-year fixed mortgage rate is 4.625%. While this was the case last week, few lenders were readily quoting it.  More lenders were instead offering 4.75% (extra margin in rate sheets). When taking into account loan pricing improvements awarded over the past four sessions,  a greater number of lenders are now actively quoting 4.625%. Some are even offering 4.50% again.  On FHA/VA 30 year fixed "Best Execution"  is 4.375% and in some cases 4.25% is on the table. FHA quotes at 4.50% are widespread.  15 year fixed conventional loans are best priced at 3.75%. 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:  With four consecutive days of rallying behind us, lenders are now teetering on a shift lower in Best Execution mortgage rates. We're now more open to the idea of short-term floating than we have been over the past three weeks. One important factor that will play a role in Best Execution quotes moving lower is a continued "flight to safety" into the bond market.

A "flight to safety" happens when investors are nervous about owning risky assets like stocks, but do not want to miss out on earning a return on their funds, so they allocate their money into risk-free government guaranteed U.S Treasury debt to provide a safe-haven AND an investment return. As benchmark Treasury yields fall on "flight to safety" buyer demand, prices of mortgage-backed securities move higher in unison. This allows lenders to reprice their rate sheets for the better and gives originators an opportunity to offer fence-sitting borrowers lower mortgage rates or more competitive closing costs.

CURRENT GUIDANCE:  With the week's major auctions over, bond markets have turned out to be heavily predisposed to the sideways movements that have been responsible for closing costs merely shifting around while Best-Execution remains unchanged.  With those costs having been about as low as they were going to get before reaching the next notch lower in Best-Ex, floating made better sense last night than it does today when closing costs have risen back toward the middle of the week's range.  Floating here is a crapshoot that is probably based on tomorrow's economic data, although there are other factors in play which don't adhere to a set release schedule including the debt ceiling debate and ongoing potential of headlines out of the EU.  Those two things present some uncertainty against the "scheduled surprises" offered by economic data.  Bottom line, there's still room for personal preference regarding floating/locking, but if borrowing costs rise tomorrow,  we'd be a step closer to the next notch HIGHER in Best-Ex to more certainly advise locking up short-term floats.

READ MORE: Rate Movers: Political Gamesmanship and Curve Spreads

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BEWARE: MND 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?

*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.