10/06/2022
Everyone pays points!* (note asterisk)
Unless you’ve stayed away from any form of communication in the modern world, it's no mystery that mortgage rates have been moving relentlessly higher in 2022. But how high is high? That will depend on a number of factors, including:
• Date and time of day of the quote (things change quickly – some days, we can have multiple re-pricings)
• Specifics of the scenario (loan type, loan-to-value, credit score, etc)
• Presence of discount fees ("points", or, upfront interest) and other upfront costs in the rate quote
For a moment, I’d like to discuss the last bullet point – paying points – in the current lending market, and why it seems like so many homeowners are currently paying them.
To truly understand why, you'd need a basic understanding of how mortgage-backed securities (MBS) translate to mortgage rates.
I’ll break out the crayons and try to explain so a Marine could understand (quite the feat): MBS are bonds comprised of multiple mortgages. They're offered in 0.5% increments, which are known as “coupons”. Each coupon contains a certain range of mortgage rates (with +1.125% being the upper limit).
As an example, an MBS coupon of 6.0 would be required for a mortgage rate of 7.125% (6.0 MBS coupon +1.125%). A 6.5 MBS coupon could not facilitate rates any higher than 7.625% (6.5 + 1.125%).
The problem is that 6.0 MBS coupons only existed in the history books up until last week (so they are based on antiquated data). Even then, it takes a significant amount of time and market stability for new coupons to be properly priced.
Due to the pricing uncertainty, lenders are incentivizing homeowners to pay discount fees (points), for a lower rate. In fact, certain agencies / lenders aren’t even currently offering 0-point loans (note: especially true with Gov’t loans – VA, FHA, USDA, etc).
Regardless, the encouragement to pay points reflects in the pricing: the same 1% discount fee with today’s pricing typically gets the owner a .375 - .5% reduction in rate. Months back, that same 1% discount fee may have only reduced the rate by .25%. This creates a shorter recapture period (read: time it takes to make the upfront cost of the point back via monthly savings of lower rate) and may be the right way for homeowners to hedge against higher payments.
The net: until the market has a defined price for these coupons (if they hold in rate / price), buyers must expect to pay a bit more for “reasonable” rates. On the other end, seller concessions will more than likely become more and more predominant (and needed, in certain cases) while these pricing trends persist.
Hope this bit of knowledge helps you understand the current pricing environment a touch better -
As always, here to help along the way. 😊
Cheers,
Drew (& Team)
