Discussing "Discount Points" Amid Eerily Steady Mortgage Rates

Mortgage rates held perfectly steady today, with most lenders offering the exact same quotes as yesterday.  The most prevalent conventional 30yr fixed rates remain in a range of 3.375% to 3.5% on top tier scenarios, but some lower quotes are possible in certain circumstances.  This has to do with the upfront costs associated with any given rate.  

Policies vary by lender, but in many cases, you have the option to pay more money upfront in exchange for a lower rate.  Some refer to this as "paying points," buts that's a bit of an archaic and pejorative term.  Self-annointed gurus used to say "never pay points!" But that's not always good advice.  Discount (or "discount points") offers a perfectly legitimate and objective choice to pay more money upfront in exchange for a lower interest rate.  Whether or not the trade-off makes sense to you is fairly subjective.  

In the more intelligent conversations, discount is discussed in terms of "breaking even" or "breakeven months."  In other words, if I pay extra cash today, how long will it take for me to break even due to lower monthly payments.  Closer to 10 years?  That doesn't make sense for most people.  5 year or less, however, and it can start to make better sense.  

All this to say that the discount points required to move down to 3.25% are fairly low for most lenders at the moment.  For instance, paying an extra .5-.6% of the loan amount could get you another eighth of a point lowerin rate, and it would take just over 4 years to break even on that extra expense.  Of course, if you plan to sell or refi in 3-5 years, this makes no sense, but if this is the last house and mortgage you want for the foreseeable future, it's something to consider.  One caveat here: an unintended consequence of some legal interpretations of recent regulatory changes is that lenders price all loans the same way and don't give clients the option to adjust discount points to get a lower rate.

Loan Originator Perspective

I do not see much benefit in floating right now.  Each time bonds try to rally, it is met with quick selling.  If you are closing within the next couple weeks, I think locking today would be the wise decision.  Longer term closings could consider floating but keep in mind that rates might edge higher before they head back down so only float if you can tolerate the risk.  -Victor Burek, Churchill Mortgage

Bond prices were nearly unchanged today, and my rate sheets improved slightly compared with yesterday's. The markets appear to be lacking motivation now, we need some global economic drama to drop rates. Of course, just because we need it doesn't mean we'll get it. Given pricing is still near multi-year lows, there's nothing wrong with locking early in the process now, especially if your debt ratios or cash to close is tight. Most of my pipeline is locked. -Ted Rood, Senior Originator

Today's Best-Execution Rates

• 30YR FIXED - 3.375%
  
• FHA/VA - 3.25%
  
• 15 YEAR FIXED - 2.75%
  
• 5 YEAR ARMS -  2.75 - 3.25% depending on the lender

Ongoing Lock/Float Considerations

• In the biggest of pictures, "global growth concerns" remain the driving force behind the long-term trend toward lower rates

• Amid that trend, periodic corrections toward higher rates can and will happen.  These can happen for no apparent reason, or they can be brought on by changes in expectations surrounding central bank policy at home and abroad, as well as geopolitical and systemic risks
  
  
• Time horizon and risk tolerance are 2 variables to consider when it comes to locking.  If you have plenty of time and don't mind losing some ground, set a limit as to how much higher rates could go before you'd lock to avoid further losses, and then float in the hopes of never seeing that limit.
   
• In the shorter-term, it's always good to look for lock opportunities after rates have been moving lower or sideways repeatedly, especially if they've since begun to move back up in any sort of consistent way. 
   
• As always, please keep in mind that the rates discussed generally refer to what we've termed 'best-execution' (that is, the most frequently quoted, conforming, conventional 30yr fixed rate for top tier borrowers, based not only on the outright price, but also 'bang-for-the-buck.'  Generally speaking, our best-execution rate tends to connote no origination or discount points--though this can vary--and tends to predict Freddie Mac's weekly survey with high accuracy.  It's safe to assume that our best-ex rate is the more timely and accurate of the two due to Freddie's once-a-week polling method).