September 5, 2018
Mortgage rates have only been moving higher gradually, but things are adding up. Today's move brings them to the highest levels in nearly a month.
In recent weeks, I've made it a point to qualify the actual pace of the movement by drawing a distinction between actual interest rates and the upfront costs associated with those rates. Because mortgage lenders tend to offer rates in 0.125% increments, it takes a certain amount of market movement before the average loan applicant would see a change in their quoted rate. But bond markets are moving every day. Upfront costs allow lenders a way to fine tune a loan quote.
How many days can we see small increases in these upfront costs before actual interest rates begin to change? As it happens, today is probably the first day where a majority of lenders would be quoting rates 0.125% higher than they were a few weeks ago. Realistically, however, this should always be a "net present value" calculation for prospective borrowers. Would you rather have a higher monthly payment and pay more upfront? Or vice versa?
In other words, borrowers could still decide to go with the same interest rate quoted 2 weeks ago, but the upfront costs would be high enough that most would consider simply moving up to the next 0.125% higher in rate and erasing the increase in upfront costs. To oversimplify, here's an example with a $200k loan:
- 4.625% rate (payment $1028)
- Closing costs are $800 more than 2 weeks ago
- "interest rate" is unchanged, but "effective rate" is higher due to higher closing costs
- 4.75% rate (payment $1043)
- Closing costs would be $400 lower than 2 weeks ago
- Interest rate is higher, effective rate is also higher because the change in monthly payments will quickly supersede the savings in upfront costs.
Loan Originator Perspective
Bond markets hovered near unchanged today. It'd be nice to consider this a rally, but it's far too early to do that. I'm still locking loans closing within 45 days for all but the most risk-tolerant clients. -Ted Rood, Senior Originator
Today's Most Prevalent Rates
- 30YR FIXED - 4.625-4.75
- FHA/VA - 4.25-4.5%
- 15 YEAR FIXED - 4.125%
- 5 YEAR ARMS - 3.75-4.25% depending on the lender
Ongoing Lock/Float Considerations
- Rates moved higher in a serious way due to several big-picture headwinds, including: the Fed's rate hike outlook (and general policy tightening), the increased amount of Treasury issuance to pay for the tax bill (higher bond issuance = higher rates), and the possibility that fiscal stimulus results in higher growth/inflation.
- Despite those headwinds, the upward momentum in rates has cooled off heading into the summer months. This could merely be the eye of the storm, or it could end up being the moment where markets began to doubt that prevailing trends would continue.
- It makes sense to remain defensive (i.e. generally more lock-biased) because the headwinds mentioned above won't die down quickly. Temporary corrections can be explained away, but it will take a big change in economic fundamentals or geopolitical risk for the big picture to change. While that doesn't necessarily mean rates have to skyrocket, there's a good chance it means rates will struggle to move much lower than early 2018 lows until more convincing motivation shows up.
- Rates discussed refer to the most frequently-quoted, conforming, conventional 30yr fixed rate for top tier borrowers among average to well-priced lenders. The rates generally assume little-to-no origination or discount except as noted when applicable. Rates appearing on this page are "effective rates" that take day-to-day changes in upfront costs into consideration.