Stop Waiting for 3% Mortgage Rates

Host, Kristen Ambos: Hello everyone, and welcome to the Always On Point podcast here with Kristin Ambos. So glad to be back! Last week you were here, and if you listened at all, we talked a lot about the comeback buyer. We talked a lot about making sure your pre-approval—I can't even believe we're still saying this, but we are—that your pre-approval is solid. Your loan officer matters, your real estate agent matters, everybody in this transaction matters. You want to hire as a consumer the best team. As a real estate agent, you also want to hire the best team. But while you're going through with it, you want to know what you want to do, you want to ask the right questions. We lived in a world of 3% interest rates for a long time. You know what else we've done? Lived in a world of 6% interest rates for an even longer time. And the amount of people that still think 3% is coming back... I love you, but it's not. Not anytime soon. So, let's reverse that thought instead of saying, "When are rates coming down because I really want to buy when rates are down?" Let's reverse that: When are rates going up? When should I buy before they go up? That's probably the right conversation to have these days. And I say that because all the economists out there—housing economists, mortgage economists, just economists in general—all have no idea when mortgage rates are coming down. Everything I read... Some people gave it a really good guess this year, and you know what? We did fall to around at one point, I think we were at about 5.875ish on a 30-year fixed, which was phenomenal. Today, as I cut this, we are in the upper 6s again. So, what does that look like? Well, it's a point higher than it was earlier this year, it was. A year ago, we were a point higher. So either way, we're still on that middle of the road. So instead of saying, "I'm going to buy when rates come down," start saying, "I need to buy before rates go up." Change your thinking. The reason why I say that is because even though rates are going up, what's shocking everyone is that home appreciation is still going up. So the people that now should have bought two years ago that didn't, that got out of the market, are now paying more for a house, maybe a little less interest rate, but still paying more for a house. Those people who a year ago had said at 5.875, "I'm not buying till they're at 5%," are now paying more for a house and at a higher interest rate. Do not try to time the market. As a 25-year veteran in this industry, I'm here to tell you: don't time the market, you'll never win. And I should preface too that I'm not a massive gambler, but I do know that the residential investment as a home is one of the safest bets long-term. And I do know that year over year, you typically win on that investment no matter what the interest rate is, no matter what you're borrowing. And with that, it's because mainly—and go back to any graphs—appreciation typically happens between 3% and 6%. So you're most likely in any market going to see, year over year for the last 50 years, an appreciating market. You're also going to see rates hovering in that 6% range. So what I would venture to say is we are not in an inclining range right now at all; we're actually in a very normal market. Probably more normal than we've seen in a really long time. Given the inflation, given the jobless reports, given the war we just got out of, given all the things—this is a normal market. It's just not normal to what we think it is, because we really wanted to hang on emotionally and financially to that 3% era. It was an anomaly. We're not seeing it; it's not coming back. So my topic today is really wanting to stress the adjustable-rate mortgage (ARM), because what I'm seeing happen—and I'm going to give you some examples of why you want to think twice about an adjustable-rate mortgage: Is that adjustable-rate mortgage at, let's say it's 5.875% today, and the conventional conforming rate is 6.875%—just so we have easy math of one full percentage point—is that adjustable-rate mortgage the shiny penny that you want to pick up off the ground because it's a lower rate and it's more affordable? 辦Absolutely. I get it. I get it. Most of those rates I'm seeing are coming at about a 5-year, so a lock-in period of 5 years. Here's the big piece of it: your local bank or credit union who's pushing this 5-year ARM at 5.875% is typically not telling you two very important things you need to know: 1. It is not locked after 5 years. Which means there's a good chance your loan and your interest rate can adjust then, year over year, by at least 1% to 2%. Which means you're going to have to refinance. Most people in the last 5 years—and I'm sure you've heard it, again, if you follow me at all, you know I can't stand "Date the rate, marry the house." Sure, date the rate. Here's what happens to people that dated the rate and weren't prepared for it a couple years ago: They have a lower interest rate, and they didn't refinance 6 months ago, and now they're going to be... you know, now they have to refinance because their 5-year adjustable-rate mortgage is coming up, and they're going to have to refinance at 6.875% where today's rates are. What if they would have locked in 3 years ago at 6.25%? Would that change things? It might! And I'll tell you what: I've never heard an upset client the way I hear them when they have to refinance out of their mortgage into a higher interest rate mortgage, making a higher monthly payment, and they had to pay a set of closing costs to do it. They're never mad, never ever mad when the rate goes down and they're saving money. But when they have to spend more money to stay in their house and pay a loan officer to rewrite that loan for them, there's nothing worse for a person, and I truly understand why. Be careful with that shiny penny, because it very well may cost you way more money in the end. Do the math! Have your loan officer do the math for you. If that adjustable rate in 5 years is going to save you more than that 6.875% would have over the course of that 5 years, okay, maybe we're talking. But if this is a home you're going to stay in over 5 years, I highly suggest a fixed rate. Because then you don't have to worry about it at all. You don't have to worry about it, and guess what? If rates come down, you can still refinance to a lower rate! You don't only have to do it when you're in an adjustable-rate mortgage. If you're in a fixed-rate mortgage at 6.875% and you want to refinance down to 5.875%, all day long! You're going to save a lot of money, and the closing costs you're going to pay are going to be worth the savings. But again, if you're in a lower interest rate and you want to stay in your home long-term, and now you have to pay a loan officer to do that work to put you in a higher rate... it's really hard to swallow. Really hard to swallow. The other piece of this that's so important that I don't think people realize—and the majority of... you know, cause again, not going to lie, I've lost a few loans. Talk to any loan officer out there, we've all lost a few loans to local credit unions doing adjustable-rate mortgages. Here's what that loan officer at that credit union or at that small local bank don't tell you: You have to qualify to refinance. Hear that again: When you refinance, you have to requalify for that mortgage that you're going to refinance into the home that you already own! So, what that means is, if anything has changed in your financials... ● Did you lose a job? ● Maybe you chose to quit your job and stay home with the kids? ● Maybe you had to buy a vehicle cause your vehicle died after you bought the house and now your debt-to-income ratio's too high? ● Maybe you were working when you bought the house and decided to retire and now are on a fixed income so your debt-to-income ratio is too high? Those are the five biggest factors I see in people that now they don't qualify to refinance out of their balloon or their ARM. Balloon is essentially the same either way; those loans are only locked for those 5 years. I had to tell a gentleman last fall that he had to sell his dream second home because his bank put him on an adjustable-rate mortgage, and when he went to refinance it, they told him they couldn't do it—the same bank. The only option he had—because he went on a fixed income to retire into a second home which he loved, which was now going to be his primary house—he had to sell it. He could not afford to keep it because he went on a fixed income and his debt-to-income ratio was too high. He didn't qualify for the refinance! Didn't matter if he owned the house on title and deed or not, he still needed to qualify for that mortgage. Talk about a heartbreaking phone call. Those are phone calls I don't wish on anyone. And somehow I had to be the bearer of bad news because the loan officer didn't tell him this up front; instead, they just wanted to get the loan done. So what did they do? They talked him into an adjustable-rate mortgage, never talked about his future, strategizing with him on why a fixed rate would be the world of difference. He would still own that home, that would still be his home in retirement, and he would still be okay. I am telling you guys right now, I have never been a huge believer in adjustable-rate mortgages. Now, caveat: If you call me and you're like, "Kristin, I'm only going to own this home for 3 years max. I know it, this is my plan, this is what I'm going to do, this is why I want to do the adjustable-rate mortgage," awesome! That's what they're designed for. But if you're calling me to say, "I just want the lower payment right now and I'll figure it out later," that is a telltale sign that you need a fixed rate now. If you're like, "No, this is my house, this is going to be my house long-term"—fixed rate. "I'm going to be here for 30 years"—fixed rate. "If I'm going to be here for 10 years"—fixed rate. "I'm going to change jobs"—fixed rate. "We might have kids"—fixed rate. "I'm going to retire"—fixed rate. All of the reasons! All of the reasons fixed-rate mortgage. These are people who now know what their payment is, it's never going to change, the principal and interest is never going to change. Obviously, we can't control taxes and insurance, but that's not going to change. I get to stay in my house for the life of 30 years. I can pay it off in advance if I want to, and if rates come down, I can refinance. Those are the best of all worlds! So please, before you get into an adjustable-rate mortgage, speak to the loan officer and strategize. And if you're trying to strategize with them and they're drawing blanks because they don't know how to say anything other than, "Our adjustable-rate mortgage is 5.875%... Our ARM is 5.875%..."—if they can't say anything different, then they don't know how to do your loan. They're pencil pushers. They're telling whatever the bank is telling them to do, and that's all they're sticking to. And you guys, strategy more than anything right now is so important. So then my next topic is: "Well Kristin, I'm on social media and every loan officer is saying how they need to strategize." Cause every loan officer is saying strategy, strategy, strategy! Strategy matters, it does. That's where asking more important questions helps you understand if they truly are a strategist with you or if they're pencil pushers. If they can't explain to you what the difference between a 30-year and an adjustable-rate mortgage is to you, what that adjustable-rate mortgage is going to do after it expires, and what you have to do in order to qualify to refinance to make sure you can get out of that cause you want to stay in the home... you need to run and get to a loan officer who can do all of those things with you. Do we have adjustable-rate mortgages? We do! By the time I'm done talking to clients about that, we've understood where they're going to be, and I've even said to them, "You know what, you are in that position, I would take the lower interest rate in an adjustable-rate mortgage." Of course I don't ever want to see somebody go to another lender, but I'm also real, and I know what is important to some people, and making sure that I'm fulfilling their financial needs is extremely important. The problem is, that's not reciprocal. Lenders don't do that. They want that business, they want it now. Why? Cause if they don't close your loan, they don't make any money! They don't care what you do in 5 years; they want to make money right now. They're not trying to hold you as a client for the next 5 years; they just want to close the loan now, and then they'll figure out what new tactic is going to be out to sell and then they'll get it to you. Again, tried and true, 25 years, so many different markets. I'm going to go ahead and I'm going to call this one the most normal market we've been in in a while, even though it might feel strange and odd. I'm telling you, it's not any weirder or stranger or odder than it was in 2008 and 2010, which I worked through. It wasn't any more strange, weird, or odd in the "I can buy a house and I just tell you how much money I make, and I don't have to provide a pay stub, I don't have to provide a bank statement"—that was weird! This is the most normal market I've seen in my tenure, where we actually are pre-approving people on the basis of their qualifications, protecting them from themselves and overspending so they don't foreclose. Normalize interest rates, normalize house prices! This is it, you guys. So instead of saying, "I'm going to sit back and wait for rates to drop," start saying, "I better buy before rates go up." Because if I buy now, not only is my house going to appreciate, but I'm also going to be able to potentially refinance later. Never say promise, because we don't know! Again, all the economists out there, myself included, our crystal ball is clear today—and only today. And any lender that tells you any different doesn't know again what they're talking about; it's a sales tactic. Glenda Baker—the wise Glenda Baker once said, and I own it and I will give her all the credit in the world: "My crystal ball is clear today and today only." And so if you want to call and talk about what that looks like today, what that looks like in the next couple months, extremely important. The other thing I'm going to tell you right now is when you're getting pre-approved: If rates today are at 6.75%, get pre-approved at 7.25%. Rates are probably going to go up a little bit. I don't love it any more than you all do, but you want to know that if rates go up while you're shopping, that you can still afford that house at 7.25% as you can at 6.25%. That's called protecting yourself, that's called protecting your asset and knowing what both the best and worst-case scenarios are. So when you're out shopping, you're prepared and not blindsided. You're not ripping any band-aids, you're not trying to hurt yourself or then get into a house, fall in love, then call your lender and say, "What are rates today?" and you thought it was going to be 6.375% and they tell you it's 7%, and now you freak out and don't want to buy it. The likelihood that that payment isn't a whole lot different incrementally is probably true. So understanding what that looks like is very important. I reach out to my clients every 30 days to make sure they know where they're at, know where their pre-approval's at. Should we adjust anything? How's the home search going? All of the above, because I want my buyers to be as confident as they can going into that home purchase as they've ever been, and I want them to feel as confident at the offer as they do at the closing table. That's what this is supposed to look like! And if that sounds like something you want to do too, then I want to work with you. So again, just really trying to make sure everything I'm hearing and seeing on the streets is getting put out to you guys as real and as broken down in layman's terms as I possibly can, because gosh, it's hard to get through it! It's even hard for me to get through it all, and I've been doing this a long time. I can't imagine what it's like for a newer real estate agent, a newer homebuyer, a first-time homebuyer, who already this is like speaking another language to them. Now we add in all these extra layers where we can't necessarily trust the system, and I don't want that for you, I don't want that for anyone. So please, please, by all means, give us a call. You can look us up, you can Google us, you can do anything—our contact information is right in all of our social media. Get a hold of us, message us. We want to talk to you, and we want to make sure that you're in the best position possible to buy that next house—to buy that first house, to buy that second house—and that you have it for the entirety that you wanted it at the rate and payment you want it for. Thank you again so much! Share this with anyone, subscribe, that way you get all the latest podcasts coming out every Wednesday. We appreciate it, and thank you again for listening to the Always On Point podcast here with Kristin Ambos. We'll see you next week!