Last Friday fence-sitting borrowers had a chance to lock up the most aggressive mortgage rate/closing cost combination we've seen since early December.  This might sound exciting but the improvements were modest in the grand scheme of things.


Mortgage rates have bounced around a relatively tight range since the end of December. 4.875% has been the sweet spot on conventional 30 year fixed home loans while 4.75% has offered the most sensible note rate/closing cost scenario on FHA 30 year fixed loans. Closing costs have been the only major variable in the decision making process.

Don't get me wrong. Intraday volatility has been abundant in the secondary mortgage market, but "Best Execution" has barely budged in the primary market (consumers).

Nonetheless, mortgage rates/closing costs were on the low side of that range last Friday. And it presented borrowers with an opportunity. We outlined the varying degrees of opportunity in this post... Mortgage Rates: Varying Degrees of Opportunity Presented

Mortgage rates failed to breakout of that range this week. And although "Best Execution" barely budged yet again this week....closing costs did spike. Rising borrowing costs are illustrated in the chart below.

(Sorry for the small disclaimer. I had to add it just in case folks used the chart in their own commentary. Which is fine as long as you give MND credit for it. See the disclaimer below as well)

On this graph you will see five different colored lines. Each line represents a different 30 year fixed conventional mortgage note rate.  The numbers on the right vertical axis represent origination closing costs as a percentage of your loan amount. Also notice the dark black horizontal line at 0.00. If the note rate graph line is below the 0.00% marker, then the consumer may potentially receive closing cost help from their lender in the form of a lender credit. 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 fees. 

As an example, 4.00% note rates would cost a borrower 5.5 discount/origination points at the closing table, as a percentage of their loan amount. This works out to $5,500 for every $100,000 borrowed. This is clearly not advisable nor is it attainable.  A more relevant example is the 5.00% note rate. A very well-qualified consumer should be able to close on a 30 year fixed mortgage at 5.00% and get closing cost help from your lender. 4.75% is back above the 0.00% line after moving briefly below it last week. See my comments below on 4.75%.

Plain and Simple: if the note rate line is moving up, the closing costs associated with that quote are rising. Thus, it should be obvious how mortgage rates behaved in December. They moved quickly higher. It should also be obvious that closing costs rose this week! But the range is still in play. And once again..."Best Execution" barely budged even though closing costs rose.

The "best execution" conventional 30 year fixed mortgage rate is 4.875%. Lenders are still offering 4.75% but the upfront permanent buydown costs would take over 10 years to recover over the life of the loan. On FHA/VA 30 year fixed loans "best execution"  is 4.75%. If you're shopping for a 15 year fixed mortgage rate, we see a sweet spot at 4.25%. On 5-year ARMs, we've heard of very well qualified borrowers being quoted 3.50%.

FYI: THIS POST provides an example of what I mean by "upfront permanent buydown costs would take over 10 years to recover over the life of the loan". In that example we we're talking about a 4.75 to 4.625% buydown. That same scenario applies to the 4.875 to 4.75% buydown today.

Important Mortgage Rate Disclaimer: 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. Oh and we can't forget the intense fiscal frisking that comes as part of the underwriting process.

"Best Execution" is the most efficient combination of note rate 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.

ANNOUNCEMENT: Mortgage borrowers need to be made aware of some internal policy shifts that are taking place within the industry right now. Starting on April 1, Fannie Mae and Freddie Mac will have increased their fees on certain loans. However because the underwriting and loan delivery process takes about 30 days, lenders are implementing these new costs now. Specifically, borrowing costs have increased on deals with "loan to values" over 75%. This applies to even the most creditworthy borrowers. It is totally based on the amount you wish to borrow relative to the value of your home. Ask your originator for more information on the increase in "loan level pricing adjustments". It will impact your borrowing costs.

We expect more of the same behavior next week. Stability in "Best Execution" note rates and volatility in closing costs. If the stability of "Best Execution" is threatened, we will alert. Good or bad.