It was another volatile day in the mortgage market. Don't let that distort your perspective of reality though. When looking at the behavior of mortgage rates on a longer timeline, loan pricing has steadily improved over the past two/three-weeks. But positive progress has officially stalled out and now we're bouncing around a relatively tight range. We've gone sideways.....
The session started with lenders offering improved loan pricing vs. yesterday's quotes, but as the day wore on mortgage-backed securities prices slowly slipped lower and lower. This forced many lenders to reprice for the worse. The damage was minimal though. For the most part closing costs barely budged. The Best Execution 30-year fixed was unchanged.
CURRENT MARKET: The "Best Execution" conventional 30 year fixed mortgage rate is 4.875%. For those looking to buy down their rate to 4.75%, this quote carries higher closing costs. The upfront cost of permanently buying down your rate to 4.75% is not worth it to many applicants. We would generally only advise the permanent floatdown if you plan to hold your new mortgage for longer than the next 10 years. Ask your loan officer to run a breakeven analysis on any origination points they might require to cover permanent float down fees. On FHA/VA 30 year fixed "Best Execution" is still 4.75%. 15 year fixed conventional loans are best priced between 4.125% and 4.25%, but 4.25% is more efficient in terms of the floatdown breakeven cost. Five year ARMS are best priced at 3.625%.
PREVIOUS GUIDANCE: Much of today's rebound in the bond market was
attributable to short-term trading strategies that may or may not
represent a shifting bias toward
lower rates in the months ahead. We are still waiting for confirmation
of an extension of the recent rally. The Employment Situation Report is
always a high risk event for mortgage rates. We are encouraged about
the potential for an ongoing mortgage rate recovery beyond that, but are
not expecting it to take shape on a quick timeline. If your lock/float
more immediate, it's a great time to be locking. Long termers have a
bit more thinking t- do
and most importantly, must decide how much they would sacrifice in
before locking at a loss in exchange for the chance to see if rates can
further from here.
NEW GUIDANCE: It turns out we were right to be nervous about the market's true directional bias because yet again today we were unable to confirm an extension of the recent mortgage rates rally. The modest amount of positive progress we made yesterday afternoon was essentially erased today. And day trader strategies continue to distort the true bias of bond investors.....keeping us in a defensive state of mind. Remember: 4.875% is as good as it's gonna get unless you have the cash on hand to permanently buydown your mortgage rate to 4.75...which is currently very expensive to do! SEE CURRENT MARKET ABOVE...
This is why.....
Lenders have moved the Best Execution 30-year fixed note rate as low as they possibly can without drastically altering their pipeline hedging strategies. This is a factor of what production mortgage-backed security coupon is most liquid in the secondary mortgage market. On conventional loans, the 4.50 percent MBS coupon is the hedging vehicle of choice for lock desks. Home loans with note rates between 4.875 and 5.25% are generally used to fill 4.50 percent MBS coupon trades. Until MBS investors demonstrate sustainable demand for 4.00 percent 30-year fixed MBS coupons, lenders will not find it economically efficient to quote 4.75 percent note rates without expensive permanent buydown costs. From that perspective, if you are floating a conventional home loan interest rate, you should not be expecting further improvements to your actual rate in the short term. If the bond market recovery rally continues, closing costs will improve, but on the whole, it will take a sustained move higher in 4.00 percent MBS coupon prices for Best Execution to dip below 4.875 percent."
What MUST be considered BEFORE one
thinks about capitalizing on a rates recovery?
1. WHAT DO YOU NEED? Rates might not recover as much as you want/need.
2. WHEN DO YOU NEED IT BY? Rates might not recover as fast as you want/need.
3. HOW DO YOU HANDLE STRESS? Are you ready for MORE VOLATILITY in the secondary mortgage market?
"Best Execution" is the most 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 buydown 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 intense fiscal frisking that comes along with the underwriting process