A 7-week mortgage rates range was finally broken last Friday. The directional move that took place afterward was not fence-sitter friendly. "Best Execution" home loan borrowing costs rose rapidly.

"Teetering on a ledge"  <--- That's how we would describe this week in the primary mortgage market.

WHAT ARE WE TEETERING ON? WHAT'S AT STAKE?

Potentially another 0.25% to 0.375% move higher in "Best Execution" mortgage rates. That's right. Right after we just experienced a frustratingly large spike last week...the potential for another still exists. The uncomfortably quick move was a function of a phenomenon we call  "snowball selling".  Snowball selling in the secondary mortgage market forces lenders to reprice their rate sheets for the worse.  Snowball selling has been known to warrant multiple reprices for the worse in one day. This is very bad for consumers who are floating their mortgage rate. The reason snowball selling is extra dangerous is not necessarily the frequency of reprices, but the size.

Plain and Simple: Snowball selling in the secondary mortgage market forces lenders to reprice their rate sheets for the worse. At first the impact is only higher closing costs, but as the snowballing gains momentum and reprices for the worse get bigger and bigger.... The "Best Execution" 30-year fixed mortgage rate spikes higher.

"Bext Execution" is the most 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 buydown costs.

To illustrate the recently "spiky" behavior of mortgage rates, we offer the chart below. It graphs the average origination closing costs associated with  note rates as quoted by the five major mortgage lenders.

If the note rate line is moving up, the closing costs associated with that rate quote are rising. In December, closing costs rose rapidly. Mortgage rates did improve from those levels, but then moved sideways for 7-weeks. And then the range broke last Friday.  Since then consumer rate quotes have risen back to their December highs.  Snowball selling is bad for mortgage rates....

Each line is 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. SEE OUR MORTGAGE RATE DISCLAIMERS AND OTHER ASTERISKS BELOW.

CURRENT MARKET*: The "Best Execution" conventional 30 year fixed mortgage rate is STILL split between 5.125% and 5.25%. If you meet the requirements outlined in the disclaimer below, you should still be able to execute a loan commitment at 5.25% with lender credits. 5.125% is still available but not in every market across the country. The upfront cost of permanently buying down the rate from 5.125% may not be worth it to every applicant. We would generally advise the permanent floatdown if you plan to live in your house and pay your new mortgage for longer than the next 5 years. 5.00% is still out there as well but will require origination points paid at the closing table.  Ask your loan officer to run a breakeven analysis on any origination points they might require to cover permanent float down fees. On FHA/VA 30 year fixed "Best Execution" is priced between 4.875% and 5.00% with the same comments above re: the split and closing cost credits. 15 year fixed conventional loans are best priced between 4.25% and 4.375%. Five year ARMS at 3.625-3.75%.

YESTERDAY'S GUIDANCE:  "Minimal damage was done today. The bleeding is still stopped. While we're not yet in all-out "rates are going higher at least for the next 30 days" mode, there is a high risk the bleeding will resume. And once the bleeding begins, you will have one or two days at most to make a decision. There still exists a 50/50 chance that rates will improve over the coming days. But you better pay extra close attention to the market because we're definitely on a ledge."

NEW GUIDANCE: We're still teetering, but we backed a bit further away from the ledge today. Snowballing selling is still a risk,  but you will have two or three days to make a lock decision if rates do start to tick higher again. Don't get comfortable. Pay extra close attention to the market because we're definitely still on a ledge.

What MUST be considered BEFORE one thinks about capitalizing on a rates recovery?

   1. WHAT DO YOU NEED? Rates might not recover as much as you want/need.
   2. WHEN DO YOU NEED IT BY? Rates might not recover as fast as you want/need.
   3. HOW DO YOU HANDLE STRESS? Are you ready for MORE VOLATILITY in the secondary mortgage market.

SAY NO TO SNOWBALLING!

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 intense fiscal frisking that comes along with the underwriting process.

*The primary mortgage market is still very segmented at the moment because of a pending shift in the production mortgage-backed security coupon in the secondary mortgage market.

MORE EXPLANATION ON THE GRAPH: As an example, 4.00% note rates would cost a borrower 7.00 discount/origination points at the closing table, as a percentage of their loan amount. This is clearly not advisable nor is it attainable.  A more relevant example is the 5.00% note rate. 5.00% is very close to the 0.00% line.  If you do receive a lender credit on that note rate, it is only because you were asked to pay an origination fee upfront.