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 actual 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).
Buy-ups and Buy-downs
As mentioned above, most lenders' rate sheets are structured with 0.125% increments between the rates. For any given RATE there is a COST associated. It's important to note that a cost can be negative or positive. This means that some rates with enough "negative cost" allow lenders to pay some or all of the borrowers' closing costs. It is almost always the case that higher rates equate with lower costs. In other words, a borrower may have to pay their own closing costs in one quote, whereas the lender could cover a portion of the closing costs in a quote that was .125-.250% higher.
Conversely, borrowers can opt to pay additional up front costs in order to BUY DOWN the rate. This may or may not be advisable depending on the borrowers' personal preferences as well as the economic logic and break-even time required for paying the extra costs. In other words, paying more up front means that you'd need to keep a loan for a particular period of time in order to save enough in terms of lower monthly payments to break even on the additional up front expense.
These buy-ups and buy-downs (costs to move higher or lower in rate) can vary greatly from rate to rate. For example, on a $200,000 loan, it may only cost $800 to move to the next .125% lower in rate whereas the next .125% could cost $1600.
Best-Execution: The Sweet Spot
The variations in the buy-ups and buy-downs create sweet spots where the combination of COST and RATE is more efficient at one rate vs another. While there is an inherent degree of subjectivity in assessing this sweet spot, there are also several proprietary objective factors that help determine Best-Execution.
In general, our Best-Execution rate mentioned in the RateWatch article each day will be the most efficient combination of rates and fees at a cost level that typically allows most well-priced lenders to offer a no-closing-cost (at the very least, this means no fees/points charged by the lender) quote for the most ideally qualified borrowers.
We don't rely on numbers alone in making this determination, especially if several adjacent rates are viable contenders for Best-Execution. In this case, we involve our community of mortgage professionals to get a consensus not only of what they're quoting, but also which options their clients are choosing. This subjective method is combined with the objective measurements taken from lenders to arrive at the consensus range.
Best-Execution Vs. Day-Over-Day Changes In Rates
Because rates are generally offered in 0.125% increments, it's rare that markets move enough in one day to cause Best-Execution to adjust to the next eighth higher or lower in rate. However, markets are always moving and on a vast majority of days, the COSTS associated with the RATES are moving. These smaller day-to-day variations are accounted for by the daily changes seen on our mortgage rates page.
On this page, you will see interest rates that aren't available in order to illustrate the day-to-day movement in mortgage rates even when that movement isn't sufficient for us to announce a shift in the Best-Execution rate.
The bottom line is that Best-Execution is found only in the RateWatch articles and moves up or down only in .125% increments and only when the underlying costs have changed enough that the new Best-Execution rate becomes more efficient than the previous one. The rates seen on the mortgage rates page are a purely notional representation of the day-to-day movement on rate sheets.
All About The CHANGE
In the cases of both the Best-Execution rate and the daily changes seen on the mortgage rates page, please keep in mind that there are numerous variables that can affect loan pricing for any given scenario. Both of our rate metrics won't apply to every borrower in every scenario and are generally on the more aggressive side of the market. They assume an ideal scenario with top tier credit qualifications and loan factors
Their ideal use is to benchmark the day-to-day changes as they provide a common point of reference. As you read along, you may have to infer that when we're talking about a .125% improvement in rates that your own starting point may have been different from our Best-Execution starting point. Unless your scenario falls in that "best case" category, the important thing to track is the CHANGE as opposed to the outright levels. Above all, your mortgage professional should always be able to show you several options and explain any factors in your scenario that are affecting pricing.
On a final note, even after speaking to your mortgage professional about factors affecting pricing, it can still be the case that different lenders quotes would vary. Decisions around this topic are more subjective, but we'd advocate not letting costs be the be-all-end-all deciding factor, even if they're the most important for you. Great service and well-managed expectations are worth a lot, and that's something we can't quantify for you. A smooth and timely mortgage process can end up saving you more money than the lowest possible quote you can find. When in doubt, ask your trusted mortgage professional.