For the first time in over a month, the Best-Execution rate for 30yr fixed mortgages rose from a rounded average of 3.875% to 4.00% today. The underlying borrowing costs associated with 3.875% didn't rise by a significantly painful amount, but the small increases across the board, combined with one huge move by a huge lender, was enough to bring the average rate closer to 4.0% than 3.875%.
You may well wonder what the heck this all means. So we'll go into more detail tonight for enquiring minds. Our methodology for determining daily Mortgage Rates is somewhat complex, and involves an objective component based on lenders raw prices as well as subjective impression from our network of originators. We look at the rate sheet offerings from most major lenders and calculate the buy-ups and buy-downs between each rate (incidentally, rates tend to be offered in .125% increments, which is why we're always conveying best-execution in .125% increments whereas the actual daily average is reflected on the Mortgage Rates page).
Sometimes, the "sweet-spot" is obvious from looking at lenders raw pricing. For example, For each .125% lower in rate, you'd have to pay more and more in terms of closing costs (which could be referred to as "discount" or "origination" or "points" among other things, but I'd greatly like to stay out of semantics debate and instead focus on the spirit of the matter. Bottom line: it costs more money up front to pay a lower rate over time, whatever a lender wants to call that fee). If it cost 0.4% of the loan amount to move down from 4.125% to 4.0%, another 0.5% to move to 3.875%, but a whopping 1.2% to move to 3.75%, it's clear that this lender's Best-Execution is at least 3.875%. In some cases, some clients may opt to pay big buydowns if they understand the longer time it will take to breakeven on the extra upfront expense in terms of monthly payment savings from an .125% lower rate.
Other times, the gaps between rates are fairly close together for several rates near Best-Execution. This makes the process of deciding that lender's Best-Ex rate much more subjective. In these cases, we assume scenarios with the best combination of lowest closing costs but not at the expense of monthly interest savings that could be recouped in less than 5 years. This almost always means a loan with no origination fee. But when the range of options are similarly viable, we involve the community to get a consensus not only of what they're quoting, but also which options their clients are choosing. This is combined with the objective measurements taken from lenders, and each lender's best-ex rate goes into calculating the average.
All that to say that this average moved up from 3.92% to 3.98% today. 3.92 rounds down to the closest eighth whereas 3.98 rounds up, thus, the 4.0% Best-Execution today. But keep in mind that 3.875% is still very much "out there," meaning, deals can be viably structured with 3.875% rates just as easily today as they could have been on Friday, as long as you can afford the increased closing costs. Also keep in mind that different lenders are continuing to price in the effects of the Tax-Cut-Extension at different times and in different ways. One large lender priced it in with today's rates and the difference in closing costs would be substantial if you didn't know where they were coming from. But the tax cut extension calls for a 10bps increase to a fee that lenders have to pay the government on each loan. That 10bps fee is like 0.1% interest rate increase, almost as much as the .125% increments we just discussed! So just like moving up and down by .125% increments in rate affected the costs by .4, .5 and even 1.2% of the loan amount, you can see how a difference of 0.1% being priced in overnight could have a drastic effect on closing costs on a particular loan depending on the lender and the initial rate.
Today's BEST-EXECUTION Rates
- 30YR FIXED - 4.0%, 3.875% still a contender
- FHA/VA -3.75%
- 15 YEAR FIXED - 3.375%
- 5 YEAR ARMS - 2.625-3.25% depending on the lender
Ongoing Lock/Float Considerations
- Rates and costs continue to operate near all time best levels
- Current levels have experienced increasing resistance in improving much from here
- There are technical reasons for that as well as fundamental reasons
- Lenders tend to get busier when rates are in this "high 3's" level and can throttle their inbound volume by raising rates or costs.
- While we don't necessarily think rates are destined to go higher, given the above facts, there seems to be more risk than reward regarding floating
- But that will always be the case when rates oper