Home loan borrowing costs improved slightly today, though Best-Execution rates remained the same.
Nervous tensions surrounding the potential economic impact of the earthquake in Japan sent a shock-wave through global markets today. U.S. stocks suffered and as is often the case during equity sell-offs, bond markets benefitted, including those that directly influence mortgage rates.
CURRENT MARKET: The "Best Execution" conventional 30 year fixed mortgage rate is still 4.875%. For those looking to permanently 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 keep your new mortgage outstanding 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 at 4.125%. Five year ARMS are best priced at 3.50%.
PREVIOUS GUIDANCE: The failure of the bond market to extend its recent rally really serves to drive home a point we've been harping on for several weeks now: WE'RE STUCK. If you're floating, you're doing so for marginal improvements in UPFRONT COSTS ....not RATE. See disclaimer below please. When it comes to the outlook for lower rates in the months ahead, we're still optimistic about that expectation but realize it will require a steady drip of bond friendly (economy-unfriendly) news and events . In the short-term, or at least until "the levy breaks" and all hell breaks loose around the planet, we don't expect lender rate quotes to look much better than they do right now. The following comment hints at the commitment required from bond market investors if we're going to see mortgage rates to move notably lower.
CURRENT GUIDANCE: Today is one of two days this week where no economic data was available to drive the markets, the other being this Friday. As such, bond markets and therefore, mortgage rates, were tied to movements in the stock market more closely. With Japanese stocks taking what will probably be their single biggest day of earthquake-related losses (over 6%), it's no surprise that money flowed out of stocks and into bonds. The gains seen today are STILL not enough to consider mortgage rates "UNSTUCK" though. So with a high-risk event ahead (Federal Reserve meeting tomorrow) and densely packed economic calendar in the middle of this week, we see no reason to change our current guidance. Our willingness to consider a long term rate recovery is the same, but there are many reasons to remain defensive of the positive progress that has helped rates move to one-month lows. While it's true that rates can move either direction, they can get worse much faster than they can get better right now.
"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."
Plain and Simple: We're going to need a sustained bond market rally to see "Best Execution" break through the 4.875% barrier. Otherwise this is as good as it gets.
"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.