What's Up With Interest Rates These Days?

What Is The Rate Outlook?: The U.S. and global economies are in uncharted territory given mass post-crisis government stimulus spending, so even the best market oracles don't know how rates will play. But here's what we do know: rates drop when mortgage backed securities (MBS) rise, and MBS are at all-time highs because they're one of the best safe havens for global investors rattled by market uncertainty. This is why rates are at record lows. MBS are priced for a very weak economic outlook. Any signs of improvement will cause MBS to sell and rates to rise.


Getting Rate Quotes: Even the best rate websites like MortgageNewsDaily aren't a substitute for a rate quote. As noted in the 'Cost or No-Cost' section, there's a direct relationship between rates and fees, so a rate quote will depend on your objectives and it can only be provided to you by a lender. Always insist on a full written term sheet displaying the rate, term (e.g., 30yr fixed), every single line item closing cost, total monthly costs including insurance and taxes, and total cash-to-close or cash-in-hand at closing. Lenders are required by Federal law to give you a three-page Good Faith Estimate but this form is a joke because it doesn't show you all of your line items, nor your total monthly cost, nor your cash-to-close. So make sure your lender shows this to you in some written format before you lock a rate.

Is Your Rate Locked For Long Enough?: Banks are busy during these rate dips and quoted rates can only be locked for a certain number of days. Ask your loan agent when they expect to close your loan, and if their quoted rate lock is enough time to get the deal done. Also refer back to the 'Provide All Documentation Immediately' section above, so you can hold the loan agent's feet to the fire if the delays are on their end and not yours.

Your Rate vs. Headline Rates: Every Thursday Freddie Mac publishes a rate survey from the previous week. This is source material for virtually all media. In addition to the fact that those rates are expired by the time you're reading about them, there's lots of fine print the headlines don't catch including: those rates are only for loans to $417k, single family homes only, owner-occupied only, and most of those loans have .7% to .8% in points (aka extra fees). Rates on this website are more timely, but again, a rate quote is based on your profile and your property profile so it must come from a lender to be specific.

What If Rates Drop More During Loan Process: When you lock a rate, you're setting that rate then the market will go up or down. It's very much like buying a stock. The main difference is that lenders have what they call 'renegotiation' policies if rates drop after you've locked. All renegotiation policies are similar in that rates have to drop significantly for you to be able to capture some of that drop after you've already locked a rate. Bottom line: renegotiations don't let you capture the entire gain because you've already made a commitment. So as an example, if you locked a rate at 4.75% and the quoted rate for that same unlocked loan a week later dropped to 4.5%, most lender renegotiation policies will give you half of the gain which would put you at 4.625%.

Julian Hebron is San Francisco branch manager and a top producer for RPM Mortgage and also runs mortgage and housing blog The Basis Point.