A Claremont resident and column reader recently wrote to me, wondering about the read numbers behind mortgage rates.
“We always hear about average mortgage rates,” my reader wrote. “As you know, averages can come from a large pool of data that are very close to the average. For example, if the average mortgage rates are 7% and 100 people get a mortgage, maybe 90 of them receive a rate between 6.8% and 7.2%. On the flip side the average could be 7% the range was 6 to 8%.”
Last week’s column: Loan payments for Orange County’s record-high median-price house tops $10,000
Speaking in terms of average rates from Freddie Mac’s weekly primary market survey, here’s how Freddie explains it in part, on its website:
Freddie previously surveyed lenders to come up with the average rates.
In November 2022, the traditional mortgage rate survey approach was replaced with loan application information submitted to Freddie Mac’s automated underwriting system, Loan Product Advisor or LPA.
In general, mortgage rates are determined by a combination of various factors such as current economic conditions, the lenders risk appetite and overhead costs and borrowers’ credit profiles. However, the application data is neither a pledge by the applicant nor a commitment by the lender.
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There are many advantages of using loan application data instead of a survey, including the dramatic increases in coverage and a real-time view of the mortgage market.
Limitations
Although there are many advantages of using loan application data to measure the mortgage rate, it comes with a cost.
First, we do not have the information on the mortgage rate when lenders do not intend to sell to the secondary market or if they do not use the LPA underwriting tool.
We measure the mortgage rate not in the origination but in the application state. Therefore, our reported rate does not represent the rate at the time of loan origination.
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LPA does not capture points or fees.
The full cost of a mortgage is captured by both the interest rate, the discount points and origination fees paid by the borrower. Theoretically, a borrower who pays discount points would receive a lower rate compared with the rate they would receive if they paid no points.
However, in practice, we have found that in recent years the difference in rate between a borrower paying discount points and borrowers who do not pay discount points has been very near to zero.
In my view and to Umamky’s question, the Freddie rate spread is obviously broad.
The only way to know for sure is to individually price out your mortgage. The mortgage industry uses so-called loan level pricing adjustments.
For example, if you have a high credit score (740 or more) you will end up with better pricing than someone who has a low score (660 or less).
Down payments also matter. Generally, the more skin in the game you have, the better the risk you are of not defaulting. This is called loan-to-value. You will receive better pricing when you have a lower loan-to-value.
Owner-occupancy also receives better pricing than second home pricing or investment property pricing.
The Freddie survey is a simple rate snapshot, void of the granular pricing requirements needed to get to the exact pricing.
Freddie Mac rate news
The 30-year fixed rate averaged 6.87%, 8 basis points lower than last week. The 15-year fixed rate averaged 6.13%, 14 basis points lower than last week.
The Mortgage Bankers Association reported a .9% mortgage application increase compared to one week ago.
Bottom line: Assuming a borrower gets the average 30-year fixed rate on a conforming $766,550 loan, last year’s payment was $102 less than this week’s payment of $5,033.
What I see: Locally, well-qualified borrowers can get the following fixed-rate mortgages with one point: A 30-year FHA at 5.75%, a 15-year conventional at 5.625%, a 30-year conventional at 6.25%, a 15-year conventional high balance at 6% ($766,551 to $1,149,825 in LA and OC and $766,551 to $1,006,250 in San Diego), a 30-year-high balance conventional at 6.5% and a jumbo 30-year fixed at 6.75%.
Note: The 30-year FHA conforming loan is limited to loans of $644,000 in the Inland Empire and $766,550 in LA, San Diego, and Orange counties.
Eye-catcher loan program of the week: A 30-year mortgage requiring 30% down, fixed for five years at 6.25% with 1 point cost.
Jeff Lazerson, president of Mortgage Grader can be reached at 949-322-8640 or jlazerson@mortgagegrader.com.