Money Matters – Ep. 5 – Mortgage Rates – Is timing really everything?
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MC
Welcome to Money Matters, the podcast that focuses on how to use the money you have, make the money you need, and save the money you want. Now here is your host, Miss Kim Chapman.
Kim (host)
Thank you for tuning in. I am your host, Kim Chapman. Whether you are joining us for the first time or you've tuned in before, please hit the subscribe button so you can be notified when we have another exciting new episode. The quote for today reads Opportunities are like sunrises. If you wait too long, you might miss them. Homeownership still is and probably will forever be the American dream.
Kim (host)
There is nothing like watching the sunrise or sunset from a place you call your own. However, over the last decade, extremely low-interest rates have opened the door to homeownership for many consumers that otherwise might not be able to buy their first home. Additionally, it lowered interest rates resulting in thousands of dollars of savings for new homeowners or consumers who refinanced their mortgages.
Kim (host)
But have you been listening to the news lately? Mortgage rates are on the rise for the first time in recent years. What does this mean? If you want to become a homeowner, or maybe you want to refinance your current mortgage, but you're not quite ready Maybe you're mentally there, but you have a couple of barriers to overcome. Maybe your credit score isn't quite there.
Kim (host)
Maybe there are some income stability, instability, or insufficient savings that you need to deal with before you take the plunge. What is really at stake if the window of opportunity to capitalize on low-interest rates closes? Let me put this in perspective. Just a 1% increase in interest rates over a 30-year mortgage can change your monthly mortgage payment by more than $100 If you factor in rising inflation and on top of that, an increase might eliminate the ability for some consumers to ever own their first home.
Kim (host)
Today we will discuss what impact increasing rates might mean for your bottom line. Is this the right time? Should you wait? What happens if you wait? My guests today are two of Neighbors, very own mortgage experts, Bridgette White and Matthew Coy. Welcome, Bridgette and Matthew.
Matthew
Good morning.
Bridgette
Good morning, Kim.
Kim (host)
So let's start out by telling our listeners what your role is here at Neighbors and give them just a little bit of insight and maybe an overview on our mortgage department before we dove into this topic.
Bridgette
OK, Kim, I've been with the mortgage department for about 18 to 19 years, been in Neighbors for 20 years, and I'm the current VP of the Mortgage Lending Department.
Kim (host)
OK, Matthew.
Matthew
I am our junior mortgage loan originator. I've been at neighbors for four years, been in the mortgage department for a year and a half. Prior to that, I worked in our direct lending and internal audit departments.
Kim (host)
OK, and so Bridgette, just give our listeners just a little overview in terms of what is our mortgage department? What do we offer? And then we'll start talking about the rates and how these rates may impact not just the products here at Neighbors, but mortgage rates globally.
Bridgette
At Neighbors Mortgage Dept, we offer 15, 20, 30, even ten-year loan mortgages conventional mortgages. We have a special product that is for first-time homebuyers. You can finance 100%. It's called our Purchase Power Program. That helps those who don't have down payments to try to get into a home for the first time without PMI. Yes. No PMI insurance.
Bridgette
Thank you Matthew. So that's a bonus there. But it is a little bit of a higher rate so go into that one. But it does definitely help our first-time home buyers. We also offer lien products. So when you do get ready to build you can start with us, get your land and then move on to another lender for construction.
Bridgette
We don't currently offer construction lending with us.
Kim (host)
OK, so I just want our listeners to get an idea of what we offer here in that the two of you are just part of a much larger team. So if any of our listeners are interested in mortgage products after listening to this podcast, they can definitely go to Neighbors FCU dot org and check us out. So to get started, I'm going to really give a little history about interest rates to put this whole controversy and topic into perspective.
Kim (host)
So back in the 1990s, the average interest rate was 10.13%. I know this probably stunning some of our listeners, especially when you see rates as low as two and 3%, you are probably toddlers at this time, but it was 10.13% back in the 1990s and then it dropped to around 7% in 1998. In the 2000s, the rates decline from 8.0.
Kim (host)
5% to an average of 5%. Then in 2010, the new decade saw rates continue to decline to the mid 3% range. Now fast forward and rates increased a little bit because of some global turmoil and of course after the 2016 presidential election they were ranging between 3.9% and 5.34%. Then there was COVID and in response, the Federal Reserve dropped federal funds rates.
Kim (host)
So out of December of 2020, Freddie Mac reported an average mortgage rate for a 30-year sitting at 2.68. That is really really low. I purchased my first home back in 1999 and I think rates were somewhere close to what we have here six or 7%. And I actually thought that was a good right. If only I had known maybe I would have waited until, you know, a little bit after 2000 and I could have gotten 2.68.
Kim (host)
So I want to start out with we're already in the first quarter or actually I'm sorry the second quarter of 2022. Time is flying. So where have you seen the market rates change so far this year Bridgette.
Bridgette
Already from January until now they've jumped in January. You could get as low as three and a half on a 30 year and now you're looking at 4.7. Five to 5%. So just in those few months they've done nothing but creep up. And so, you know, I had a gentleman, he was looking into pulling the trigger in January.
Bridgette
He could have got locked in at three and a half he waited because he felt like, oh, you know, now this is all going to blow over and we're going to get better rates. He just wasn't having that. The rates weren't going to get better. So now when he's looking at it, he's looking at like 4.75 for his rate scenario.
Bridgette
And that was almost a $200 increase in his payment.
Kim (host)
So I'm ready just right off the bat. You're starting to see where that window of opportunity that seems to be closing is having an impact on prepay on a prospective buyers. So overall, in terms of refinances and purchases, how has that change or that increase impacted applicants? I mean, are you seeing a decrease in applications are you seeing maybe a increase because people are trying to rush and get to that mortgage product before the rates continue to rise?
Bridgette
We're not really seeing an increase in applications at the moment. Generally, the months that we're going into May, June, July, you typically see an increase just overall in consumer purchasing during those months. So we're anticipating to see an increase in that, whether rates go up or down. But when rates do go up, that shortens refining says typically people are not going to want to refinance because maybe they took advantage of the boom in 20, 20 with the low rates and they don't want to refi a lot of our income from 2020 2021 were revised when those rates were down in the in the twos threes areas mid threes around there you always see a spike
Bridgette
when you get below the four mark usually but now we're almost up to the fives again where we're hitting 55 and a quarter. If you do a cash-out refi. So people are not wanting to necessarily refinance that purchase. Yes, you'll see probably more purchases now than you will see the reverse. OK.
Kim (host)
And I know my office sometimes becomes a revolving door at this time of the year with homeowners or prospective homeowners coming in wanting to say, hey, what do I need to do to get ready for homeownership? And in most cases, they're not there yet. And so if you have somebody that's interested in purchasing a home, but not for another six months because they've sat down with me and there are some adjustments they need to make, maybe they need to work on their credit a little bit and they've got to wait.
Kim (host)
How can these rate increases or what impact might it what might it mean for them in terms of their buying power, their monthly payment, or just overall total cost if, you know, if they have to wait a year from now and if we were to estimate that rates are still going to increase?
Bridgette
Yeah. If they continue to rate weight and rates do increase, they're going to see a higher payment. There's no doubt about it. No matter where their credit score is, they're going to have that issue of like that gentleman who waited and just three months and there was almost a $200 a month increase difference in his payment. So they'll need to budget differently.
Bridgette
So if they're going to sit down with a counselor in June, let's say January had that man sat down with the counselor and they said, OK, you're good to go based on where your debts are, this would be a comfortable house note for you. I wouldn't say push up too much higher than that. Well, that would cause that gentleman, he could still get a loan, but he may not be able to get a $250,000 loan.
Bridgette
He may have to back his budget down to maybe one 8200 whatever to make that difference in the payment increase due to the rate environment increase. So the longer you wait in a high rate environment, you know, the more costly it will be for you. But on the other hand, you could take advantage of being a renter in a high inflation period.
Bridgette
Consumers are paying much higher costs for everything across the board. So rents are going up. Well, as a renter, you don't want to continue to have your rental payment go up so lock into a 30-year mortgage at a fixed rate. And then now you're, you know, you're in homeownership, your home typically is going to appreciate.
Bridgette
So you'd want to go ahead and dive in.
Kim (host)
So of course we've been talking about how the rate has changed because of the market, but how much of an influence is credit on an interest rate that a consumer or an applicant would get when they come in to apply for a mortgage loan?
Matthew
It's a large influence. Going back to what we were just talking about, I just wanted to point out there are some benefits to a higher rate market. Right now. We're in a seller's market because inventory is low, so sellers can charge higher prices for their homes. As rates go up. Unfortunately, that's going to force some buyers out of the market, people that were on the cusp of qualifying before.
Matthew
If the rates higher they're not going to qualify anymore. So those people will remain renters and there will be more inventory available because there will be less buyers in the market. So you can look at it that way. There's also going to be an opportunity with foreclosures because the government will shortly be ending the moratorium on foreclosures so that will increase inventory as well.
Matthew
So rates going up. You know, most of the news is bad, but there are some benefits.
Kim (host)
So I know that you deal specifically with land loans. Are there any advantages for a consumer? Again, we're talking about somebody that may not be really ready to come in tomorrow, put in that application. Are there any advantages maybe to just going ahead and doing a land loan and waiting to do the actual mortgage or construction loan at a later time?
Matthew
Our land loan product has been fairly consistent during the pandemic. We have seen people holding on to them for longer because when the pandemic hit, materials prices for construction were all over the place. So typically we would see our land loans paid off fairly quickly as people roll into construction loans. But now we see them holding on to them longer.
Matthew
We have a fixed rate on that product.
Kim (host)
I still want to kind of circle back and talk about the influence of credit, how much of an impact in terms of an interest rate. So if you've got a consumer with let's just rank them excellent, fair and poor how much of a differential, how differential would the interest rates be without saying, OK, this one would get 5%?
Kim (host)
You know, is it a two point difference, a three point difference? Is it a half a point difference?
Matthew
So when you see rates quoted, typically that's going to be the lowest rate that can be offered by an institution. Credit runs in tiers. Typically, as long as you're a 740 or above, you're going to be in that top credit tier. But that's not the only factor that influences rates. You're going to get hits on that best rate.
Matthew
And there's a variety of factors that can cause those hits. One of them is your credit score. So like I said, as long as you're above a 740, you're going to be in that top tier. And then every 20 points is a different tier. You're also going to get hits for your loan to value ratio, which would be how much you're putting down, how much we're lending you versus the value of the house.
Matthew
And then another thing that can cause a hit on a refinance is whether you're taking cash out or not. So if you're getting cash out the rates, you'll take a rate hit versus a rate term refi where you're just trying to get a lower rate or a lower payment.
Kim (host)
OK, so now let's talk about shopping rates let's assume I'm a excellent top tier credit person. I've got that 850 score, right? And I go to a lender. Yeah, say a 50 and I go to a lender and they approve me and I think I like the rate, but I want to find out can I get a better rate?
Kim (host)
But I also know that consumers that come to see me hate have having credit inquiries more than a bad toothache. So what information can you provide for consumers that may want to go ahead and shop rates? And they're concerned about credit pools?
Matthew
Sure. Credit inquiries are a factor in your score. It's a small factor, but it is a factor. The credit bureaus understand that people want to shop large purchases like this around. So there's typically a 14 to 45 day window depending on the model that you're looking at, where inquiries within that time frame will only count as a single inquiry as far as the effect.
Kim (host)
OK, so basically what you're saying is if I apply for a mortgage loan today, that's one inquiry. But if I apply ten more times in the next 14 to 45 days, it's still going to only count as one inquiry.
Matthew
Not count as one inquiry, but the effect would be the effect of one.
Kim (host)
01, two, three, OK, just one part of.
Matthew
The increase would be listed and you know, it's not necessary once you do that first application, if you can ask that lender to give you your primary credit score, when we pull credit in the mortgage industry, we look at all three credit bureaus Experian, Equifax, TransUnion, and we're going to use the middle score and that's fairly standard. If you can find out what your middle score is from that lender, you don't even necessarily need to submit applications with other institutions.
Matthew
You can call them and say, I know what my middle credit score is. Here's my income. That to income ratio. They can figure that out and they can give you a rate, quote, OK, without submitting a formal application.
Kim (host)
So I know some of our listeners are probably ready. They're on the fence. They're thinking, I want to go ahead and do a mortgage application because I don't want the rates increase. Maybe they'll increase Monday, maybe the increase in May. But I know there's something we call a rate lock. Can you explain what a rate lock means?
Bridgette
Yes. That means you're locking in your rate for a particular period of time. They have 15 day lock rates, 3045 and 60, someone in a 15 day lock rate. That would be someone who has gone into the mortgage process. They're all the way to the end, almost they're getting ready to finalize things and they've been waiting on the market to change maybe.
Bridgette
So they're going to wait and do a short lock rate because they want to take advantage of if rates are going down. But since we're in a high rate environment, I would suggest, you know, locking in lock at 45 days or 60 days because the longer your lock rate, that's how long it holds it. So if you start your process with your lender and typically most lenders can finish you within 30 to 60 days unless there's some type of issue with your title or something to that effect.
Bridgette
So let's say you lock in at 30 days, you may receive a little bit better of a rate than if you would choose to lock in at 60 days. Shouldn't be a huge difference maybe an eighth of a percent difference if that and it may not be a difference at all, but the difference is when you go into a longer lock rate and the rates are going up, you got yourself locked in.
Bridgette
So you've done yourself a great service by locking in and taking advantage of like 5%. What if we go up to five and a half your hour, you're already locked in at five and you're good, so you don't have to worry about those rates increasing just the biggest thing is from your lender needs to get you finished up before that rate expires because if it expires, you have to go into whatever market rate is.
Kim (host)
And that works, I'm sure for I imagine, fixed rates. What impact will these rate changes or rate hikes have on flexible rates?
Bridgette
We do not offer flexible rates in our department, so I'm not quite sure. We the credit union in general has HELOCs that are adjustable rate mortgages, and that's generally a second leave mortgage to get equity out of your home. The prime rate drops that it's not necessarily what's going on with long term mortgage rates that drops that.
Kim (host)
And so, Bridgette, you mentioned a lack that that is a product that we offer in that it does have a variable rate. So can you explain to our listeners what is a lock?
Bridgette
It's a home equity line of credit. So you're utilizing the equity you have in your home to obtain cash out to do things like home improvement or college tuition, things like that.
Kim (host)
OK, so the person would have to own their home. Would they have to have paid it out in full or could they just have a little bit of equity, had to start work?
Bridgette
No, they wouldn't have to pay it out in full. They could have maybe a first mortgage on it for about $100,000 but their value is 250. So technically you have 150,000 in equity in your home depending on what the lender is willing to lend out. On the percentile compared to the value depends on how much you can borrow.
Bridgette
So just for easy numbers, let's say you wanted to borrow on a home valued at 100,000 and you owed 50,000 on it and your lender said will lend up to 90% of that value. So you have 90,000 cap on what they'll lend you total your first mortgage is 50,000, so you subtract that out. So your home equity line of credit could be a $40,000 limit.
Kim (host)
OK, and I know that we're throwing a lot of numbers out there so I do want to kind of bring up a tool that's available to lenders and maybe Matthew or Bridgette, either one of you can explain this to a mortgage calculator and what benefits it has to a consumer. So if you're sitting at home and you're listening to this podcast and you're thinking, OK, how can I use a mortgage calculator to see what 4% means, 5% means?
Kim (host)
Or some of these are the numbers that we're using.
Matthew
I think they can be helpful for our listeners by you know, you can just play around with one and see how these rate increases would affect your specific scenario. A good thing with those calculators is someone that's very payment conscious and they know this is what I can afford as a monthly payment. You can plug a payment in there and then work backwards from there and see, you know, what does my budget need to be?
Matthew
What price range can I realistically be looking in.
Kim (host)
So I can use this tool if I want my mortgage a tap at 1200 dollars, I can put in 1200 dollars and then play with the numbers to see if that's a half a million dollar house, which I'm sure it's not. Or maybe it's a 90.
Matthew
With a large flat house. Yes, correct.
Kim (host)
Oh, down payment. I'm glad you say it. That does a down payment in fact in I'm sorry, affect your rate yes.
Matthew
As I mentioned earlier, those hits that you can take on your rate, those are impacted by your credit score. The loan to value which is basically the down payment and the cash out or no cash out on a refinance.
Kim (host)
OK, so Matthew, earlier we talked a little bit about the impact of increasing rates on the type of market that we may be facing. So right now, it is still a seller's market, meaning basically if I had a house and I wanted to put it up for sale, it would probably go really, really quickly because there are more buyers out there than sellers.
Kim (host)
So it's kind of like I can choose and go with the highest bidder. Right. But now rates are increasing. And if they continue to increase, do you think that will then change it over to a buyer's market? Or what impact, if any, do you think the rate increase on mortgage rates will have?
Matthew
It could. So right now, obviously, we're in a seller's market. Sellers can charge higher prices for their homes because inventory is low with rate increases. That is going to unfortunately price some people out of the homebuying market. Your payments are going to be higher. People that were on the cusp of qualifying before may not qualify anymore. So inventory wise, that could be a good thing because there's less people that can qualify for a mortgage.
Matthew
So therefore less people are looking to buy a home. So if demand is down, there's less people looking to purchase a home. So the existing inventory is not as low.
Kim (host)
OK.
Matthew
So we could see a transition into a buyer's market. That's possible.
Kim (host)
OK, so for now, we know rates are increasing. Hopefully that will stop. But if it doesn't and again, you know, this is really geared toward our listeners that are looking to refinance maybe make that first time purchase, but they're just not ready. But they're listening to the news, they're listening to this podcast. Maybe they're a little bit nervous about should I go ahead and jump the gun should I do it now?
Kim (host)
Should I wait? And they of course, they've listened to this podcast and they've learned some of the implications of what waiting may mean. Any final pieces of advice for those listeners that are on the edge wondering which way they should go?
Bridgette
I would recommend that if you have already prepared yourself to purchase you should probably go ahead and purchase. Even though we're in a high rate environment. Like I'd said before, you don't want to get caught in. Oh, I wish I would have because even still six, seven months down the road, rates have done nothing but continue to increase, and I could have got in and locked in at that better rate.
Bridgette
So if you've already prepared yourself as a yes, go ahead and probably pull the trigger and get into the home that you want at this time. But if you are in the process of trying to build your credit or repair your credit so that you can get into a lower rate based on getting a better credit score, even in the high environment situation, say, you know, maybe you would qualify for five and five and a half, but if you get your score up, you could get to that 5% mark.
Bridgette
If that's what you're working for, then, you know, I'd probably advise go ahead and work on it for a little bit and get yourself up. Do the things that you need to do, get with a credit counselor, get yourself up and then go ahead and go into it. Another bit of advice is if you are renting and you can handle a 2020 $500 monthly rental payment with no problem because rent is ridiculous.
Bridgette
And if that's where you're at, if you're being able to handle that with no problem, you really need to look into going ahead and purchasing your first home.
Kim (host)
All right, Matthew, any final thoughts.
Matthew
I always recommend Save, Save, Save before you look into purchasing a home. Even with our 100% financing purchase power product, there are closing costs and prepaid that have to be taken care of at closing. So some people don't always realize that you need assets upfront to be able to do this. The general rule of thumb, we mentioned PMI earlier, that's private mortgage insurance that is placed on your mortgage as part of your monthly payment.
Matthew
If your loan to value is over 80%. So ideally you want 20% down, that's not always possible. So that's why there's that private mortgage insurance available. But it's best to avoid that if possible. So save up.
Kim (host)
Some very good advice and I'm sure I have the two of you return. When we're talking about mortgages, there's so many different avenues that we can take just like Matthew was just mentioning PMI, what does that really mean? How does that impact your bottom line when you're purchasing a home? So thank both of you for sharing this information with our listeners.
Kim (host)
We hope that this has been really, really helpful for those of you on the fence. Give us a call one day and let us know if it helped you if not, definitely hit that subscribe button so that you can stay tuned and learn more information about our mortgage products and more information from our Financial Education Department. Now, it's time for the Money Minute Identify and create a game plan so that you can overcome any financial barriers that might get in the way of an approval when you're ready to apply for your mortgage loan.
Kim (host)
Talk to a certified financial counselor, especially if you need tips on how to increase your credit score so that you can get the best rate possible. And then finally, check out Neighbors FCU that or forward slash financial education. To learn more on how to use the money you have, make the money you need and save the money you want.
Disclaimer
Money Matters has been brought to you by Neighbors Federal Credit Union. An Equal Housing Lender Federally Insured by NCUA. All mortgage scenarios mentioned in this podcast should be considered hypothetical and do not reflect the current rates of Neighbors Federal Credit Union. Please visit Neighborsfcu.org to view do all current terms, conditions and rates.