Rates are a Quarter Percent higher. No wait, they aren’t higher at all.

by Tom Tousignant

in Blog, Home Buying, Mortgages, Refinancing

The last 7 business days have been a roller coaster for mortgage rates – mostly the climb up to the top of the Coaster, unfortunately.  Mortgage rates are based on Mortgage Bonds’ prices.  When the Mortgage bond prices fall, rates go higher, and when the bond prices rise, rates are falling. The picture below show the last 30 days of bond prices – you can see on Oct 8th, bond prices reached their highest point since late May and rates were at their lowest as a result.

bond prices 10/8 to 10/16

From the high price on Oct 8th of 102.06 to the low on Oct 16th of 100.375, mortgage bond prices fell by 168 basis points (100 basis points equals 1%).  This resulted in an increase in interest rates of about 0.5%.  Another way to see it: To keep the same rate you were offered on October 8th you would have to pay 1.68% more in discount points.

The rate you are offered depends on three things:

  1. You
  2. The Mortgage Bond Market
  3. The lender that will hold your mortgage (not your loan officer)

You:       The loan you apply for and are qualified for has the biggest impact on interest rates.  The loan program, credit score, downpayment or equity, repayment type, repayment terms all impact your rate.  These factors can change your rates by 0.125% to 3%. 

The Mortgage Bond Market:    As you can see above, the mortgage bond prices impact everyone’s rates every day. This explains why interest rate quotes can and do change from day to day, and why one lender may appear to have great rates one day and horrible rates the next day.  Think of the mortgage bond market as the ocean’s tide that raises and lowers everyone’s boats.

The Lender you work with:   A direct lender, such as a bank, has one set of rates – so when the tide rises, their rates rise just as fast.  A mortgage company that has the flexibility to work with a multitude of lenders can ‘jump ship’ when the tide rises.  When the tide rises, some boats don’t rise as fast as the others.  If you are working with  a direct lender, you can’t jump ship, unless you start all over, re-run your credit, and hope you jumped to the right ship.

  With an independent mortgage lender, they have the ability to work with many lenders, so when the tide rises, they can find the boat who is not floating as high as the rest.  Why does this happen?  Each day, lenders decide which loans they want to add to their portfolio.  If they want a particular loan, for example, 30 year fixed rate mortgages for $200,000 to $400,000 with credit scores above 750, they will attract those loans by offering lower rates – even if the bond market is higher.  If they don’t want a loan, for example, 5/1 ARMs with credit scores below 700, they will increase the rates on that program to discourage people from borrowing from them with that program.  This way, if the borrower insists on working with them, they will at least, earn a lot more profit, due to the higher rate they charged.

So how does all this work out?  On October 8th, I talked with a home buyer who was able to get a 5.0% rate with no discount points.  By October 16th, when he had contracted to buy a house, the mortgage bond market was 168 basis points (1.68%) worse.  This means to keep the 5.0% rate, he would have had to pay 1.68% in discount points, or 1.68% of the loan amount in added closing costs.

However, since we work with several lenders, we were able to find one lender that was only 25 basis points higher, rather than 168 points higher.  When we lock in the interest rate, we were able to preserve the 5.0% rate with just a slight increase in closing costs.

Lesson learned:

  1.  Be the best you can be for a prospective lender – credit score, downpayment, loan program, and other things all impact the interest rate you will get.  Talk with a mortgage professional ahead of time to prepare yourself to get the best rates.
  2. Mortgage Bond market – when you are buying a house, you can’t stop the tide from rising.  For refinancing, your mortgage professional should be able to monitor the market and be able to advise when the ‘tide’ is right for locking in the best rate.
  3. Work with a lender that can ’jump ship’ when needed to find the lender that wants your business the most.  If you are working with a direct lender, such as your local bank, your loan officer can’t offer you this critical service.
  4. The pundits will spend most of their time trying to analyze why the rates went higher or lower. For example,  “The market is concerned about inflation”, or “Oil prices are falling”.  Either way, it really doesn’t matter – the tide came in or out, so how does that affect your mortgage strategy for you?

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