Yesterday, a Seattle area homeowner I’ve been providing rate quotes to told me they’d like to lock if they could have the rate quote I provided him last week when mortgage rates were at an all time low. Six months ago, there would be a greater possibility that I would be able to offer her the same rate at the same price as last week prior to the Fed’s ruling on how mortgage originators are compensated (referred to as LO Comp).
LO Comp has done two things:
- mortgage rates are priced with either a rebate credit or discount points.
- mortgage originators compensation has nothing to do with how a mortgage rate is priced. A mortgage originator cannot make additional money based off rate nor can they contribute any of their compensation to their client.
Pre-LO Comp, a rule passed by the Fed in April of this year which divorces mortgage originator compensation from interest rates, I would have the abillity to decide if I wanted to off-set the difference in price by reducing my compensation, however this is no longer an option. Home buyers and those seeking to refinance now receive all rebate pricing or pay all discount points (it’s up to them how they’d like their rate priced). The Fed’s rule on LO Comp aside, mortgage rates are volatile (similar to the stock market) and yesterday’s rate or even those quoted five minutes ago may be the same but have a different price (rebate or credit).
Below is a chart from Mortgage Market Guide, a resource that I to so that I can follow the bond market (mortgage backed securites) to have an idea of what direction rates are heading, illustrating the movement in the bond market (which impacts how mortgage rates are priced).
Here’s how the same rate and exact same scenario has changed with pricing for the Seattle homeowner seeking to refinance. Remember, the percentages shown below are based on the loan amount. A rebate credit is credited towards the closing cost and a discount point reduces the interest rate for an additional fee.
- August 12: rate paid a rebate credit of 0.413%
- August 19: rate paid a rebate credit of 0.454%
- August 22: rate has a cost of 0.115% in discount points
- August 23: rate has a cost 0.211 in discount points (as of 8:30 am and is subject to change).
The difference in cost for this rate from August 12 to August 23 is 0.624% of the loan amount. This homeowner can have the same rate as what I quoted on August 12 or 19th but it’s going to have a cost instead of a credit. If this Seattle homeowner wants to have reduced closing cost, 0.125% higher in rate is paying 0.523% in rebate.
This (or any) homeowner can lock in today’s rate, gambling that they might go back down (and if they do, I might be able to renegotiate the rate lock commitment); they can continue to watch the market and “float” with the rate being unlocked gambling rates will improve; or they can do nothing and keep their existing mortgage.
If you are considering refinancing right now, I highly recommend that you contact your local mortgage originator and start your loan application so that when you are ready to pull the trigger on locking, you’re not losing valuable time. In a volatile market, rates may change several times a day and it’s not uncommon to have them change when a lock is being processed.
If you are refinancing or buying a home anywhere in Washington State, I’m happy to help you with your mortgage!