Mortgage rates were lower again to begin the week as weaker-than-expected economic data helped rates improve slightly in the morning.  The overall level of activity in bond markets that underpin mortgage and Treasury rates remained subdued, but the trading levels were strong enough for a few lenders to offer a mid-day rate-sheet improvement on top of the already stronger rate sheets this morning.  The result is an average top-tier rate (best-execution) that's now closer to 4.375% compared to last week's 4.5%.  But the reason for that is more complicated than it seems at face value.

The reason has to do with the two key components of mortgage rates.  The obvious component is the rate itself.  This is the interest rate that would appear on a Good-Faith Estimate or on closing documents--also known as the "note rate."  For most mortgage rate watchers, this is simply "the rate."  It's the singular answer most people expect when they ask "where are rates" or "what's the 30yr fixed rate today?"  But it's not the interest rate.

The actual rate of interest paid on a mortgage will be a factor of the note rate and the upfront costs.  Most upfront costs are what they are based on the state in which the transaction is taking place, the time of month you close, and the entities involved.  Most of them can't be changed based on how you choose to structure your loan.  The "discount" component (or "points"), however, usually can be changed, provided it's early enough in the process. 

The concept behind points is actually not complicated.  They provide an opportunity to compensate the lender providing the money for your loan in lieu of some of the monthly interest that would also be compensating the lender.  Pay more now or more later.  Your choice. 

In an environment where rates were generally falling for the past several years, it didn't make as much sense to most borrowers to pay out of pocket costs to refinance if they'd likely have the opportunity to refinance again in the not-too-distant future.  Now that rates are rising (or at least no longer assumed to be falling indefinitely), paying more closing costs up front may make sense.  But some rates make more sense than others. 

For MOST lenders, 4.5% and 4.25% make more sense than 4.375%.  4.5% would result in no origination fees and no discount points for most top tier borrowers.  4.25%--though likely adding more upfront cost to the picture--brings the monthly payment down enough that the cost would be recouped in less than 5 years.  It takes at least another year to recoup costs associated with moving to 4.375% only. 

In other words, for borrowers with the means to pay more upfront, 4.25% may look like the best bet, while others will be better suited by the lowest possible upfront costs and a 4.5% rate.  Again, this isn't the way the numbers will tumble at every lender, and if your scenario isn't perfect, the 3 rates in the example might half a point higher.  The same dynamic between the three rates closest to your current quote may or may not exist, but your lender will be able to tell you if moving up or down in rates/points is possible and how the numbers would tumble.  Just divide the extra cost by the monthly payment savings to determine the time it takes to break even.

Loan Originator Perspectives

"Thin trading volumes today, but we still logged decent gains in MBS. That helped mortgage rates move lower today relative to Treasury rates, but for improvements to continue, we'll need bigger treasury gains. For now, we're still open to short term floating, albeit with a hand on the lock button if we start losing ground." -Ted Rood, Senior Originator, Wintrust Mortgage

"Not much movement today and it looks like we are settled in until the FED meeting.  We did get encouraging news with the increase in existing home prices. This should help get more of the fence sitters into the game." -Chris Marconi VP Residential Lending First Midwest Bank

"The 'markets' await this week's Treasury auctions.  They could have an impact on rates in the afternoon over the next three days."  - Bob Van Gilder (BVG), Finance One Mortgage

Today's Best-Execution Rates

• 30YR FIXED - 4.375-4.5%
• FHA/VA - 4.25%
  
• 15 YEAR FIXED -  3.625%
  
• 5 YEAR ARMS -  3.0-3.25% depending on the lender

Ongoing Lock/Float Considerations

• After rising consistently from all-time lows in September and October 2012, rates challenged the long term trend higher, but failed to sustain a breakout
• Uncertainty over the Fed's bond-buying plans is causing immense volatility in rates markets and generally leading rates quickly higher
  
• Fears about the Fed's bond-buying intentions were proven well-founded on May 22nd when rates rose to 1yr highs after the Fed indicated their intention to taper bond buying programs sooner vs later
• The June 19th FOMC Statement and Press Conference confirmed the suspicions.  Although tapering wasn't announced, the Fed made no move to counter the notion that they will decrease bond buying soon if the economic trajectory continues
• Rates Markets "broke down" following that, as traders realized just how much buy-in there was to the ongoing presence of QE.  These convulsions led to one of the fastest moves higher in the history of mortgage rates and market participants have not been eager to be the among the first explorers to head back into lower rate territory until they're sure they'll have some company.
• (As always, please keep in mind that our Best-Execution rate always pertains to a completely ideal scenario.  There are many reasons a quoted rate may differ from our average rates, and in those cases, assuming you're following along on a day to day basis, simply use the Best-Ex levels we quote as a baseline to track potential movement in your quoted rate).