Mortgage Rates

Mortgage Rates Hit July Lows After Weak Housing Data 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.