As the Presidential elections heat up, there are undoubtedly very significant decisions that Americans will have to face very soon. For now, the decisions that I am referring to are more impactful to the individual homeowners and homebuyers as they grapple with essential mortgage selections. A careless or uninformed conclusion can cost a mortgagor tens of thousands of dollars extra over the life of their loan. Here are a few of the more common conversations that I have been having:
Going For The 15yr Mortgage
One of the more common questions and requests that I get is from homeowners trying to take advantage of the low rates and turn their mortgage into a 15-year term. With the drop in rates, the thought process is that they will be able to squeeze themselves into a 15-year mortgage, and their new monthly payment will be equal to or even slightly higher compared to their current payment. As much as people would like to cut down their mortgage duration, it simply isn’t as feasible for many when you do the math. Using a $400,000 loan amount as an example, the difference in payment between a new 30-year mortgage versus a new 15-year mortgage would be over $1000 per month. I always tell clients, “you can turn a 30-year mortgage into any term that you like” – it’s just a matter of making disciplined principal payments. Yes, the 15-year loan rate is slightly lower, but the spread in rate between a 15 and a 30-year mortgage is between 25-to-38 basis points of a percent. This makes the “reward” not as lucrative compared to the risk of being stuck with a higher payment that one might not be as comfortable making for the next 180 months. I also understand that some people don’t want to go “backwards” to a 30-year mortgage when they have already paid a few years – but there are solutions to that as well.
Will Rates Drop Further
It seems that everyone has their own opinion about the markets, the election outcomes, and how interest rates will move in the future. I always find it fascinating to listen to people predict where mortgage rates will be in the future. My prediction is 100% certain, and that is that no one knows. No industry expert can tell you with absolute certainty where the markets will be. Predicting the future of mortgage rates is like forecasting what the weather will be in months from now. There are indeed past and present atmospheric conditions and parameters that Meteorologists can incorporate into their forecasts, but the farther in time they go out to gauge, the more inaccurate the speculation. Mortgage rates are the same. When untrained individuals start weighing in on their long-term and short-term predictions, I simply nod and look for an umbrella. As someone who is trained in understanding interest rate trends and fundamentals, I currently see a change in sentiment in the market, weighing on rates to inch higher. If you are on the fence, now is definitely the time to get off of it.
How To Handle Closing Costs
I spend a lot of time consulting with people about how to structure their refinance. Closing costs are an essential consideration, as most people don’t realize the impact that the loan expenses can have over the life of their loan. Not always is it prudent to pay the costs out of pocket, and never is it “a given” to have the bank pay your expenses for a marginally higher rate. Each situation stands on its own, and each case requires a very personal and specific analysis. In some cases, an applicant can achieve a much higher yield or return on their money by investing it, versus paying the cash out of pocket on such low mortgage rates. Often people have debts that will be better served to be paid down than to use funds to save on increasing the mortgage balance. The list goes on and on, which is why this crucial conversation should be had on each transaction.
These significant determinations are often never addressed to the inexperienced applicant, as they blindly move forward with a loan scenario that does not suit their full financial circumstances. If you are already making an effort to capitalize on the lowest rates in history, make sure to factor in all of the variables so that you truly maximize your return. It’s about getting the lowest rate without compromising on the other decisions that you don’t even realize you need to make.
Shout out and Happy Birthday to Tali Dulitz, Steve Ebbin, Ari Feferkorn, Dave Friedlander, Robin Goldberg, Andy Schultz, and Michael Sweetney
Shmuel Shayowitz (NMLS#19871) is President and Chief Lending Officer at Approved Funding, a privately held local mortgage banker and direct lender. Approved Funding is a mortgage company offering competitive interest rates as well as specialty niche programs on all types of Residential and Commercial properties. Shmuel has over 20 years of industry experience, including licenses and certifications as a certified mortgage underwriter, residential review appraiser, licensed real estate agent, and direct FHA specialized underwriter. He can be reached via email at [email protected]