Frustrating Mortgage Rates Environment. Discussing "No Points" Loan

The theme of the week continues. Mortgage rates move down, then move up, then down, then up again! Are you pulling your hair out?

Mortgage backed securities were again unable to hold onto early morning gains following a less than expected read on Durable Goods orders.   A very disappointing Treasury auction is to blame for the turnaround which moved MBS much lower on the day and sparked reprices for the worse from most lenders; however, by day’s end MBS managed to crawl their way back to the same level at which they opened.  This late day rebound allowed some lenders to reprice for the better bringing rates back to opening morning levels.    As a reminder, today is day one of the new Truth in Lending Amendment that I wrote about on Tuesday. Although parts of this amendment are beneficial, it will add delays to the closing process.   Make sure you account for these delays by locking your loan in for an adequate amount of time. 

We had only one relevant piece of economic data to digest today, Weekly Jobless Claims from the U.S. Department of Labor.  This data set totals the number of Americans that filed for first time unemployment claims for the prior week. The report indicated that jobless claims rose last week from a revised reading of 559,000 to 584,000, which is basically in line with economists’ expectations. Continuing claims, which tracks the number of Americans that continue to file due to an inability to finding a new job, improved again for the third week in a row moving lower by 54,000 to 6.197million.  This is the lowest level since April 11th of this year. READ MORE

At 1pm eastern, the Department of Treasury will hold its final auction of the week with $28billion of 7 year notes going on the auction block.  Since the supply is known in advance, the most important aspect will be the demand by market participants for our country’s debt.  A successful auction has a high bid to cover ratio and strong demand from foreign investors.  The prior two auctions this week were rather disappointing with much lower indirect demand than prior auctions.  These poor results caused an immediate move lower in MBS resulting in reprices for the worse from most lenders.  Matt and AQ will cover this topic in detail on the MBS Commentary blog.

I received an email from a blog reader yesterday asking me why they have to pay closing costs such as title insurance, escrow fee, underwriting fee, etc… even though they were going through their current lender.  Their thought was since they already have the loan why do they need to be charged these fees again.  The reason for this is that more than likely whoever you are making your mortgage payment to does not own your mortgage.  They are the servicer of your mortgage meaning they send you the bill, collect your money, manage your escrow account and update the credit agencies.  When they receive your monthly payment, they cash your check and forward your money to the end investor that actually owns your mortgage.  They do keep a small portion to cover their expenses and make a profit for servicing the loan.  So even though you might be going through your current lender, you will have to pay these fees again because you are basically doing a new loan.

If you do not want to pay these fees, you can elect to do a no cost loan.  A no cost loan does not mean that there are no costs, rather it means the lender you are doing the loan with is paying them for you.  How they do this and still make a profit is by premium pricing which means they are giving you a higher than par rate.   A par rate means that the lender is not be paid on the back side to do your loan, so that is why when I quote a par rate I state that you must pay all costs including one point loan origination/discount/broker fee.   If you are keeping your home short term it would be better to pay less costs and secure a higher interest rate.   If the par rate is 5.00%, as a consumer you can elect to take a higher rate and with the money your lender is being paid for giving you a higher than par rate they can pay your fees for you and still make a profit.   Generally speaking you should expect a rate anywhere from .50% to 1.0% higher for a no cost loan.

HERE is a great mortgage calculator to help you determine if you should pay points or not

Early reports from fellow mortgage professionals are indicating that the par 30 year conventional rate mortgage is in the 5.00% to 5.25% range for the best qualified consumers.  In order to qualify you must have a FICO credit score of 740 or higher, a loan to value at 80% or less and pay all closing costs including one point loan origination/discount/broker fee.   As always, you can elect to pay less in fees and take a higher interest rate.  I recommend to my clients if they are keeping their home for more than 3 years to pay all the costs to secure the best rate which over time will save them much more in interest than the upfront costs.