The Juliette Interviews: Private Mortgage Banker
In this month’s Juliette Interviews, I sat down with a Private Mortgage Banker from a top firm to pick his brain about the current status of interest rates, what we may be looking at long term and what is the best way to move forward – whether you currently own a home or are planning to in the near future. He is one of the most knowledgeable and trusted Private Mortgage Bankers in Los Angeles. If you are in the market or looking to refinance, there is some great information here for you to digest:
JH: Why is it a great time to buy a home?
PMB: Interest rates are at all-time lows. It’s the perfect time to lock in a long-term, 30 year fixed. The current low rates are actually motivating people to go out and find properties to purchase! From a new primary residence, to a second home, to an investment property, buyers now have more buying power/affordability. Take as an example a 30 year fixed at a 5% rate and a $2MM loan. That payment was $10,736/month for a 30 year fixed mortgage. Now take a rate of 2.75% and that’s a payment of $8,165/month. That’s almost 24% more buying power as a result of the lower rate environment. Debt has never been this inexpensive.
JH: How long do you anticipate rates to stay this low?
PMB: If I knew this question with certainty, I would be retired on a beach somewhere that is COVID free! That said, my feeling is that that rates will move up slightly, but will continue to remain low overall for the next few years. Fannie Mae predicts a 2.8% average rate for 2021. It’s hard to say after that.
JH: Is it a good time to refinance and how long will it take?
PMB: Absolutely, but you have to make sure there is a benefit. You would look at the costs involved compared to the savings and figure out your ‘breakeven period’. For example, if it costs $4k to refinance, but saves you $100 month, it would take 40 months (3.3 years) until you started saving. Often lenders can do a ‘no fee’ refinance, where they offer a credit towards the closing costs of the refinance. Every client/situation is different, but at a minimum it’s worth the conversation. If the plan is to no longer stay in a property for the long-haul, moving to an adjustable rate mortgage could save the client money. Or the reverse, to lock in a 30 year fixed if currently on an adjustable rate mortgage and take advantage of the low rate environment is could be another great opportunity. No sense in delaying here and worth the quick call to see what makes sense.
As to the timeline, all lenders are at max capacity given the number of people refinancing and only so many employees. I would expect around 45-60 days, but there are some lenders out there taking 4-6 months! You read that correctly.
JH: Given the current rates and market, would you pick an interest-only loan over a fixed-rate loan and why?
PMB: When it comes to real estate, I like the idea of paying down debt, building equity and one day owning the property debt free. At a certain point you have to slow down in life, sleep easy and know your home is free and clear (or at least has a manageable mortgage). Also, interest only loans are generally tied to Adjustable Rate Mortgages. So, what do you do in 7 or 10 years when rates are much higher, the fixed period expires and you still owe the same amount you started with? It’s a riskier proposition that isn’t for everyone.
That said, for the high income earner that is financially savvy, interest only can be a great opportunity to invest the excess capital in higher returning investments. It does come with a higher risk.
JH: What is the difference between a 15-year fixed rate and 30-year fixed rate and when is it beneficial to use each option?
PMB: A 30 year fixed loan has you pay off the interest and principal over the 30 year period. A 15 year fixed has you payoff the interest and principal over a 15 year period. While the rate is usually lower for a 15 year fixed loan, the payment is much higher. A 15 year product is great for the client who wants to pay off their loan sooner, feels comfortable with the much higher payment, and wants to take advantage of the lower rate.
JH: What is the interest rate if you want to buy an investment property?
PMB: This is definitely case by case, but know you will pay a higher rate for an investment property as a result of the “higher risk” for the lender. During the mortgage crises, many borrowers walked away from their rental properties, but not their primary residence. As it’s a higher risk for the bank, it’s a higher interest rate. Also, it requires a higher down payment as a result of the perceived risk.
JH: In your opinion, is it a good time to buy an investment property from a lending perspective?
PMB: I’m a big believer in investing in real estate. With rates where they are and the ability to depreciate the investment and minimize taxes, it’s a great place to invest. There is also something nice about a hard asset where you can see and feel the investment versus a stock. That said, it takes time and energy! Partnering with a great agent and lender can help you take the first needed steps.
JH: Any other questions that prospective buyers ask?
PMB: Yes! “If I do want to buy something, what should be my first step?” Even with COVID and the current environment, inventory remains low and highly competitive. This is where having a strong agent who can elbow their way in, is essential. By the time you see that property on Zillow or Redin, it’s too late! Also, get your ducks in a row by starting with a lender early. Get pre-approved so when you see the property you like, you know what you can afford and generally what the rate/payments look like.