WeeklyBasis 12/16/08: Get Loans Approved Now. Then Lock Rates.

For borrowers with great credit and at least 20% equity, 30yr fixed rates (with zero points) are approaching sub-5% for loans up to $417k; rates are approaching 5.25% for loans up to $626k; and rates for loans from $625k to $1m are mid-6% range. Today the Fed reiterated their strategy to buy mortgage bonds to drive rates down—when mortgage bond prices rise on buying rallies, mortgage rates drop. The Fed also cut the overnight bank-to-bank Fed Funds Rate to near-zero, saying they’d keep Fed Funds in a 0-.25% range, and cut the Fed-to-bank Discount Rate to 0.5%.

Following this Fed announcement, prepare for the latest barrage of misinformation: 0% Rates! 4.5% Mortgages! But the reality is that, for loans up to $626k, borrowers need to pick a rate-lock range because these rates trade wildly all day every day. A wise target for borrowers awaiting the bottom is 5% or less on loans to $417k and 5.25% or less on loans to $625k. Loans above $625k are unpredictable since they’re priced on lender risk factors rather than mortgage bond trading.

HOW TO GET THE BEST RATE
Current fixed rate levels are already all-time lows, and unlike the failed strategy of perpetual 0% auto financing, mortgage rates and Fed rates will rise sharply when we’re through the worst of this crisis. Borrowers who feel they know more than policy or market makers can hold the line (and their stomachs) for lower rates. But the rest should get their loan documentation underwritten and approved now—then all they have to do is lock a rate in the next 30-90 days, which the most probable sweet spot for locking at the bottom. If they wait the 10 or 30 or 70 days to lock a rate on an actual ‘bottom’ trading day and THEN try to get their file in line for approval, they will pay higher rates for longer lock periods as lenders get overwhelmed by demand. They also might get an ugly surprise such as a low appraisal or credit score that voids their approval. So they need to get approved and ready to close now. Then lock when the time is right.

MORTGAGE RATES NOT TIED TO FED RATES:
The Fed Funds Rate is only correlated to one type of consumer mortgage. Home Equity Lines of Credit are tied to the Prime Rate which is Fed Funds+3%, so as of today, HELOCs will be 3.25% Prime plus whatever base rate a borrower has on their HELOC. The Discount Rate has no direct correlation to mortgage rates, it’s a rate the Fed charges banks for one-day to six-month loans. All non-HELOC mortgages up to $625k are based on mortgage bond trading, not on Fed rates.

Conforming ($200,000 – $417,000) – NO POINTS
30 Year: 5.0% (5.11% APR)
15 Year: 4.875% (4.99% APR)
5/1 ARM: 6.375% (6.49% APR)

Super-Conforming ($417,001 to $625,500 cap by county) – NO POINTS
30 Year: 5.5% (5.61% APR)

Jumbo ($625,500 – $1,000,000) – NO POINTS
30 Year: 6.65 % (6.76% APR)
10/1 ARM: 6.35% (6.46% APR)
7/1 ARM: 6.05 % (6.16% APR)