On Wednesday we witnessed the second stage of a potentially significant shift lower in home loan borrowing costs. "The Wall" was wavering, teetering in its most precarious position this year, but we needed more proof that it was ready to be toppled. That confirmation could only be granted by today's high-risk event: The Employment Situation Report. We needed to reinforce the rally with a weak jobs report. And that's exactly what we got.....
Job growth in May was much weaker than expected. The April and March reports were both revised for the worse. The unemployment rate rose to 9.1%. And the number of people who've been jobless for longer than 27 weeks increased by 361,000 to 6.2 million, which equates to 45.1% of unemployed Americans. That said, it's easy to see why economists are slashing their 1st and 2nd quarter economic growth projections. We needed to see at least 200,000 jobs created every month just to reach 3.00% GDP projections, five months into 2011 the economy is only averaging 156,600 jobs per month. FULL RECAP INCLUDING BRIGHT SPOTS
This data validates fears that the economy is not recovering at the pace previously thought. The bond market's reaction to this realization didn't exactly reflect that sentiment, instead it seemed like bonds were experiencing rally exhaustion, but the underlying tone remains highly-supportive of a sustained rally. Enough so to say: TEAR DOWN THIS WALL!!!
Sideways mortgage rate behavior followed by two abrupt drops is apparent in the updated chart of Consumer Rate Quotes below. If the line is moving up, origination costs are rising for that particular note rate offer. If the line is moving lower, costs are getting cheaper. The rapid decline in costs which occurred on Wednesday was the second stage of "The Wall" coming down. Today "The Wall" completely crumbled. (We make that proclamation based on weak jobs data and the hedging strategies of lenders).
The chart above compares the average origination costs (as a percentage of loan amount) for several available mortgage note rates as quoted by the five major lenders. Each line represents a different 30 year fixed mortgage note rate. The numbers on the right vertical axis are the origination closing costs, as a percentage of your loan amount, that a borrower would be required to pay in order to close on that note rate. If the note rate graph line is below the 0.00% marker, the consumer may potentially receive closing cost help from their lender in the form of a lender credits. If the note rate line is above the 0.00% marker, the consumer should expect to pay additional points at the closing table to cover permanent buydown costs and origination fees. PLEASE SEE OUR MORTGAGE RATE DISCLAIMER BELOW
CURRENT MARKET: The "Best Execution" conventional 30-year fixed mortgage rate is 4.50%. In some cases, 4.375% can make sense, but will involve increased closing costs in the form of an origination fee. This could be worth it to applicants who plan to keep their new mortgage outstanding for long enough to breakeven on the extra upfront costs. On FHA/VA 30 year fixed "Best Execution" is 4.25%. 15 year fixed conventional loans are best priced at 3.75%. Five year ARMs are best priced at 3.125% but the ARM market is more stratified and there is more variation in what will be "Best-Execution" depending on your individual scenario.
PREVIOUS GUIDANCE: It might seem like it's time to consider "The Wall" as being completely destroyed at this point. Yes, "The Wall" is indeed teetering in its most precarious position this year. Borrowing costs are certainly low enough to justify that, but the most important confirmation can only be granted by tomorrow's high-risk event: The Employment Situation Report. If that data confirms the slower than expected economic recovery message that has fueled the two-month bond market rally, new improvements will be much less tenuous. We'd remain defensive even as rates progress lower, preferring the "sure thing" of the best rates of the year today versus the risk of losing them tomorrow. That assumes either that your time frame is limited or that rates won't recover from any set-backs on the horizon. Longer term and more flexible scenarios are still justified in floating.
CURRENT GUIDANCE: With "The Wall" now torn down a path has been paved for mortgage rates to continue improving. An extended rally will not come without setbacks though. Short-term corrections are to be expected along the way. That means borrowers who are working on a shorter lock/float timeline should remain defensive. Your main goal is to protect new, lower rate quotes from short-term market fluctuations,which could happen as early as Monday and last all week. The overall bullish trend is very much in tact though. Intermediate to longer-term scenarios are more than justified in floating.
What MUST be considered BEFORE one thinks about capitalizing on a rates rally?
1. WHAT DO YOU NEED? Rates might not rally as much as you want/need.
2. WHEN DO YOU NEED IT BY? Rates might not rally as fast as you want/need.
3. HOW DO YOU HANDLE STRESS? Are you ready to make tough decisions?
"Best Execution" is the most cost 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 buy down 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 fiscal frisking that comes along with the underwriting process.