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Great Mortgage Rates (When Preparation Meets Opportunity)

Everyone loves getting a great deal. In the mortgage world, the concept of a great deal usually means getting the best rate.

The trouble with aiming for the best rate is that you are shooting at a moving target.

Rates change daily, even multiple times within a day. Sometimes these changes are for the better, sometimes they are for the worse.

Let’s take a look at how this can play out using two days of rate sheets from last week where volatility (frequent market fluctuations) was exceptionally high.

5 Rate Changes in 2 Days

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As you can see, in 31 hours we had 5 different rate sheets from just this one lender. And they were not alone as all our lenders were forced to adjust rate sheets constantly throughout Thursday and Friday. To put this into simpler terms, let’s look at what this meant in dollars for a well qualified borrower looking for a $300,000, 30 Year Fixed Conventional (Fannie Mae/Freddie Mac) loan to refinance their home.

At the open of the market Thursday this borrower could have locked in 3.625% with zero points. But better still, the lender was offering a $3030 credit towards closing costs. Since the costs for this loan are less than $3,030 this would have been a no cost loan.

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Unfortunately, these great terms were short lived. By 4:21 Eastern time the market had reversed and nearly all lenders issued a new rate sheet. Our borrower could still get 3.625% with zero points but the lender credit had decreased to $2,280. That means that the “no-cost” refinance would now cost a couple hundred dollars.

Hopefully our hypothetical borrower realized this was still a great deal and took the opportunity to lock in her loan with nearly no costs. If she didn’t, she was about to wish she had. When the market opened Friday the lender credit at her selected rate had dropped to $1740. The no-cost loan was now going to cost close to $1000.  But that’s not the end.

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At 12:52, another rate sheet was issued as the market worsened. Now the credit was down to $990 and the loan would cost about $1500. The roller coaster wasn’t over as this lender issued another re-price less than an hour later, but fortunately the Conforming 30 Year Fixed Rate was left unchanged.

To recap, in just under 31 hours there were 5 different rate sheets with pricing deteriorating over $1500 for our fictional borrower. You may be asking yourself, are lenders crazy? Do they not know what they’re doing? Why would they change the terms being offered 5 times in just over a day?

Actually, lenders have an entire department filled with very smart people whose job it is to make sure that the terms they are offering will be profitable when loans are later sold in the secondary markets. They are paying close attention to the prices being paid for mortgage backed securities and when the market fluctuates, they adjust the rates they offer accordingly.

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Let’s look at a chart similar to the ones lenders track to see what the heck has been happening, why last week was so volatile and then we’ll talk about how you can benefit from understanding this movement.

2016 Interest rate look back

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For borrowers, the simplest way to look at these charts is just to consider that green means go, or good. Any day the chart shows a green candle, rates improved from the prior day. On days when the candles are red, rates got worse.

Without geeking out too far into nerd territory, let’s just consider the orange arrow and then the orange circles. The arrow shows us that rates have been on a steady improvement since the start of the year. Rates don’t generally move in that straight of a line, for that long, without some sort of a correction. Think of it as the market just getting tired and needing to catch its breath before starting the next move.

The circles are important because we often see a “blow off” at the end of one of these big moves in rates. You can see in each of those circles a long skinny “wick” at the top of the candlestick. This shows us that the market made a big move throughout the day before ending not far from where it started with little to no improvement on the day.

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In an up move like this, what happens is that every bond trader who is short the market has to give up and concede they were wrong. This means going out and buying the bonds they sold short to repay the folks they borrowed from.

Now, let’s look back at what was going on in global markets last Thursday and Friday and see what the heck happened and then close with what you can learn about taking advantage of these brief windows of opportunity because I have a strong feeling we will have a couple more chances to lock in a great rate on your purchase or refinance loan.

As markets opened last Thursday, European banking stocks were cratering, taking markets with them. This spread to the US and accelerated as fears grew that the global economy was even weaker than thought and inflation was nowhere on the horizon. Yellen was testifying on Capitol Hill last week, admitting the 4 rate hikes she had promised last month were unlikely to happen. In fact, when questioned, she wouldn’t rule out negative interest rates in the US, a tactic already being used by several central banks in Europe and Asia.

Bottom line, a bunch of negative news, the last of the shorts getting squeezed out of the market and 4 hours of the best interest rates since 2013. By the end of the day the short traders, buying at any price, were out of the market and more orderly trading was restored. In addition, rumors leaked that OPEC was finally going to reduce oil production which could lead to price inflation and higher rates.

What are the key takeaways for borrowers currently in the market to refinance or buy?

  1. Rates move frequently and rapidly, when an opportunity presents itself, you need to be ready to move.
  2. If you understand markets and the story being told in the charts, predicting rate movements is a lot like counting cards. It doesn’t guarantee you’re going to win it does tell you when the odds are strongly in your favor.
  3. Weakness in global markets and the total lack of inflationary pressure means we will likely see a few more opportunities to lock in great rates, just like we saw last week.

If you are in the market for a new loan and want an expert to guide you through the opportunities ahead, give us a call. We would love to discuss your circumstances and work with you to implement an optimized mortgage plan.

About the Author

Josh Lewis

For 20 years, Josh Lewis, a Certified Mortgage Consultant, has worked with home buyers and their professional advisors to assure that homeownership is a key foundation to long term wealth creation by creating and implementing custom tailored mortgage plans that minimize ownership costs while maximizing wealth accumulation.

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