Low Mortgage Rates for Another Two Years? (Audio)

There’s a lot of talk about mortgage rates and whether they are heading higher. But they’ve actually gone down for several weeks, and some experts see that downward trend continuing, for at least two years. There’s even better news about refinancing loans, that we’ll hear more about in this episode.

Our guest today is Caeli Ridge. She’s president and CEO of Ridge Lending Group which is focused on helping homeowners and investors realize their dreams of homeownership. She’s been an established real estate investor herself for more than 20 years with as many as 42 investment properties at one time, and she’s dedicated to helping others do the same.

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Transcript

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Voice Over: You're listening to The Real Wealth Show with Kathy Fettke, the real estate investors resource.

Kathy Fettke: Are interest rates going to go up? If so, how would that affect the housing market? I'm Kathy Fettke and welcome to The Real Wealth Show. Our guest today, Caeli Ridge, is an expert in these things. She is president and CEO of Ridge Lending Group and has been an established real estate investor for over 20 years, holding as many as 42 investment properties across the United States, and is helping other investors do the same. Caeli, it's so great to have you back here on The Real Wealth Show. Welcome.

Caeli Ridge: Thank you, Kathy. I love being here. It's my pleasure. Hopefully, I'll be able to impart some valuable insight today.

Kathy: I'm sure you will and you're so cute because you're like, "Oh, is this video today? Because I just got back from the gym." [laughs]

Caeli: It is what it is.

Kathy: I said, I don't know, somehow over the last year it became video and I also just finished yoga. Here we are. That's the beauty of working from home. Let's talk about interest rates there. There are a lot of experts saying that they probably will creep up, but not too much, but eventually, they might. There's a lot of unknowns here. What are your thoughts on it?

Caeli: A couple of things. Actually, there's some great news that we just got last week, but I'll come to that at the end. That'll be my hook for everybody. We've actually been seeing since somewhere around February of this year, rates start to increase, creep up a little bit, largely initially due to inflationary concerns. We were seeing some of that and then specific for non-owner occupied, our investors, and second home occupancy, there was an announcement back in March, March 10th, I think, to be specific.

Fannie and Freddie released that-- This gets a little technical. I'm going to try and abbreviate, that they were going to be increasing [00:02:00] their risk layer for the non-owner-occupied properties. They have a senior preferred stock agreement with the treasury, which by the way, is purchasing or has been purchasing mortgage-backed securities for the last 18 months at the tune of $40 billion per week. The treasury has quite a bit of weight that they can throw around and for those two--

Kathy: [unintelligible 00:02:26] $40 billion dollars these days? Come on. [chuckles]

Caeli: I was writing a check a week, mind you, a week. With all of that and thank God for it. The treasury has actually really been helping throughout the pandemic, et cetera, to keep the interest rates as low as possible so that the affordability is better for homeowners, potential home buyers, et cetera, refi cash out, yadda, yadda. They released this announcement. The Treasury wants to limit some exposure and some risk.

They are maxing out the purchase per aggregator. That means that I let's say I've got $10 million worth of mortgage-backed securities or loans that I'm going to resell on the secondary market, we have dozens of aggregators that we will sell these bundles of loans to on a per aggregator per cell basis. The maximum of that bundle of loans for non-owner occupied and second home can not exceed 7%.

That news created a flurry of activity on the secondary markets and increased rates for non-owner and second home. From February to now, we've really seen some significant increase rates. Rates increased, I'd say by about a full percentage point, we were at 3.5% back in February, we've been running at about 4.5% for the last five-ish months now. Here's that hit or hook rather. This is good news.

Anybody that's been paying attention to interest rates remembers last year, the FHFA had added an adverse marketing [00:04:00] fee for all refinances. Do you remember hearing about that? It was a 0.5% fee for refinances back in June, I think it was. The Biden administration just canceled that. That's gone. It's effective August 1st. We're expecting to see any time. I think they just announced this Thursday or Friday last week.

That removal of the adverse marketing fee for refinances should improve rates. Now, by how much? It will be a TBD, but I would expect-- Again, if you're at 4.5% on a cash-out refinance, somewhere in August or early later this month, maybe we'll be at 4%, 4.25%. See that? Some good news. We might see some additional refi boom pick back up over the course of the next few months.

Kathy: Could You just summarize that for somebody who's new to the concept? What does this mean for the real estate investor?

Caeli: This means that interest rates, at least for refinance, are going to be reducing, I think, by a substantial click, maybe a 0.25%, 0.375% in the next coming weeks. We will see some improvement for refinance transactions on the 30 year fixed mortgage rate. I think that in general for purchases, as rates are concerned, as herd immunity continues to become more prevalent and servicing chains and things start to open back up, supply chains, et cetera, rates are going to come back down a little bit as well on purchases.

For the next couple of years, while we're getting through this recovery, I do think rates are going to remain on this low end. They are up a little bit now, but let's put that into perspective. We're still in some 5% interest rates on investment properties for 30 year fixed mortgages.

In summation, rates are low. I think they're going to get a little bit lower over the next weeks, months, depending on the transaction type. They're going to stay low for the next of years.

Kathy: If somebody did get a higher rate [00:06:00] recently, when can they refi into a low rate?

Caeli: Excellent. Typically speaking, you want to see-- `It really depends on how long they're going to keep the property. The math to figure out your breakeven is, figure out the monthly payment difference between the rate that you're paying now and what the refinance rate would be. Take that monthly payment difference and divide it by the cost of the loan. Let's say it's a hundred dollars a month, divide that by 5,000 in closing costs, just for example, that's 50 months recapture.

If you're going to keep the property for at least 50 months, it probably makes sense to go ahead and refinance. Now, keeping in mind too, that you'll have some tax advantage rate points that you might pay so that probably should work into the equation, but that's the math that you should use. You have to figure out how long you're going to keep the property, and then you can decide if it makes sense or not based on the savings and costs.

Kathy: I've been getting phone calls from lenders who would like to refi and offer really low rates. We came really close [00:07:00] to doing one of them until I took a deeper dive into the fees and then the reset of the 30 year fixed. It basically brought us back to paying a lot more of the interest, whereas the loan I was currently and we were paying more of the principal.

It actually ended up being a horrible deal for us, even though it looked good. It was a lower rate, too high a fees. It restarts that loan where you're paying more interest and debt. How does that work with a 30 year fixed? That's how it works. In the first 5, 10 years, you're paying primarily interest.

Caeli: Correct, yes. The first 10 even plus 90% plus of what your payment is going is going to be for interest. It's not until the back end of that loan that you start really plunking down on the principal. This might be a good segue into a fun statistic and depending [00:08:00] on the circumstances, it's very circumstantial and it depends on the property, what their plans are, et cetera.That can be a fluid thing.

When we talk about 30 year fixed mortgages, especially for investors, I think it would be important to mention to your listeners that the life cycle, the average life span rather of a 30 year fixed mortgage for investment property is probably five or six years. The percentage of investors that start on day one with a 30 year fixed mortgage and keep that loan for 360 months is less than 1%.

Depending on the circumstances, I would just be aware of some of those details too, when making a decision. There's a psychology about that 30 year fixed that I think makes people warm and fuzzy and it helps them sleep better at night. I can get it. I have some of it myself, but the reality is that pay attention to the intent of what that investment is meant to be. If it's your primary residence, probably a different conversation, but in any case, that would be my response.

Kathy: That is a conversation rich and I have all the time. He likes the comfort of that 30 year fixed. He just doesn't want to regret it in the future if interest rates are much higher. Then we have to refi at that time. He'll pay more for that [chuckles] comfort. What is it that you recommend? I think you just said.

Caeli: Sure. First of all, I wouldn't say, for investors-- We're going to just focus on the investor. I would say away from a shorter amortization loan, always. Let me get into that first. I get a lot of questions about what are 15 year interest rates? They're going to be lower than a 30 year fixed rate. However, there's no need.

Even if you want to accelerate the payoff early, there's no need to look at a shorter-term amortization because you can do exactly the same thing on a 30 year amortization. Even though the interest rate is higher by simply calculating that payment difference between the lower 15-year rate and the higher 30-year rate. Let's just [00:10:00] say it's $300 a month, whatever the number is, take that monthly payment difference and apply it with your 30 year fixed payment every month, you'll cross the finish line in about 15.4 years, I think, is the average calculation. Most importantly, and the reason I bring this up, is that the 30 year amortized loan is going to maximize or optimize the individual's qualification in their DTI. That 15 year payment is going to be significantly higher. In turn, it's going to affect a debt to income ratio, DTI. There's no reason to look at a 15 year. I definitely advise my clients, always take a 30 year. Whether you accelerate the payoff quicker or not is entirely up to you. You never pay the higher interest if you're doing that because you pay off so quickly. That would be the first thing.

The other thing I would say is, usually speaking, I like to see a recapture when we're talking about refinance. I think that's the question. I'd like to see the recap rate somewhere in that three to five-year window of breakeven, cost versus savings. Again, depending on what their, if they know what their long-term plans are. If they know that they're going to sell this thing in a year or two years, then probably doesn't make sense to refinance, but if they just refinance and they know they're going to have it in five years from now. I'd say, look at the numbers at least and do the math.

Kathy: That's just great. That's so many questions when it comes to loans. All right. Where do you see rates going with your crystal ball? I know you get asked that all the time, but let's say by the end of this year, by the end of next year, and five years from now. [chuckles]

Caeli: Again, come fall early fall, mid-fall, I think that we'll start to see rates come down a little bit from where they are now. We already talked about the adverse refi fee is going to be going away in August. That just in and of itself is going to create some reduced interest rates. We can feel pretty comfortable and confident that rates are still going to be in the mid-threes, [00:12:00] high-threes, mid-fours range at least for this year. Beyond that, I really hate predicting even past a week. There are so many different variables that can create--

Kathy: [chuckles] It's really hard.

Caeli: Totally. Here's my overall consensus. If you think about the amount of debt as a company or as a country we have amassed over the last 18 months, the servicing of that debt in and of itself is going to make it very, very difficult for the feds to increase rates. It's just not going to happen. If you think about trillions of dollars and the payment on that debt, a blip, an increase in interest rates would make millions of dollars in interest. Rates are going to stay low during recovery is what I'm going to say to that question.

Kathy: It sure seems that way. All right. Now, another question of course we have is the forbearance and that is ending in September, correct? Do you see that increasing inventory at that time?

Caeli: I did a webinar not too long ago. When this topic came up, initially, I thought, yes, maybe. It's just an unfortunate casualty of the pandemic and the forbearance, in particular, we will see some foreclosures. However, I don't think it's going to be as much as people originally maybe thought. I don't think that the Biden administration is going to allow that. I think that there'll be provisions that will try to remove as much of that as possible. I would not expect a huge flurry of extra inventory on the market. I do think that as lumber prices, whoever's following that, they just took a huge nosedive recently.

Quick numbers, last year, I want to say March, something, the cost per square board, I think, is how it's measured was $333. Up until a couple of weeks ago, I think it was $1600, right? It was insane. It took a big dip. Those supply chains [00:14:00] are going to opening up. For those reasons and in several others, I think we'll start to see a little bit more inventory.

I'm hoping that some of these factors will help lighten the frenzy, the marketplace, so that it's a little bit less competitive and prices start to just-- We always want to see an upward trajectory, but I'm sure you'll agree, Cathy, with the way in which they're going right now, it's a steep climb, it's not going to be sustainable long-term. I think the market will correct though.

Kathy: All right. Let's see, what else? Eviction moratorium too. I know that you, as a lender, focus mainly on investor properties. I would think this is something that you're looking at. You don't want to see a bunch of landlords who have borrowed money from you or from the banks you work with, suddenly not have income. Are you concerned about that?

Caeli: I feel like a lot of what has come across my desk anyway has been relatively well handled. I think that landlords have been forced to get pretty creative. We haven't seen too much of that. When things were really at their hairiest, they were finding ways to equal compromises, maybe pay a portion of the rents. Give them instructions on where to find unemployments in their areas. I mean, job listings, right? They were really getting super creative in how to help their tenants make sure that they could pay their rent. I think that most people have done a pretty decent job of avoiding that thing.

Kathy: What about cash-out refi? Are you seeing demand for that? If so, are you concerned or is it a good thing? [00:16:00]

Caeli: No, I loved the cash-out refinance and we've been talking about rates. Rates are still incredibly low. Most people are aware, but for those that are not, a cash-out refinance of an investment property is non-taxable. Borrowed funds are non-taxable. Taking some of the equity with the appreciation that we're seeing right now and utilizing it to deploy for further purchases, I love the idea. Yes, 100% go cash-out refi. We think that rates are going to get a little bit better in the coming weeks too. By all means, I think cash-out refi as a general rule is going to start to get some more steam.

Kathy: How much more expensive is it from just a regular refi to a cash-out?

Caeli: In interest rate, probably about 0.375%.

Kathy: Not too much more to be able to, like you said, deploy those funds and purchase more properties. Now, once you sell that property, it's at that time that the government will want their money unless you do a 1031. Hopefully, that 1031 stays in play. Even with the way that the Biden administration is looking at it, it seems to affect just higher-cost properties versus the ones that our members are looking at. I haven't been too worried about it, but time will tell. It takes a long time to change the tax law. It's not easy. What about adjustable-rate mortgages? I know, we mentioned that, but do you see a comeback there?

Caeli: I like an adjustable-rate mortgage, to be honest with you on it. For reasons that we talked about earlier, there's a psychology to 30 year fixed versus the adjustable rate, but statistics tell us again that the lifespan of a 30 year fixed, especially for the non-owner occupied, is in that five or six range window. right now, today, as we're talking, the secondary markets for interest rates are on what we call an inverted yield. That means in simple terms that a 30 year fixed [00:18:00] mortgage has a lower interest rate than an adjustable-rate. It's lopsided, it's inverted.

Under normal circumstances, the only reason to take an adjustable is if the interest rate is lower. Usually, by about a percentage point is what we tend to see. Right now, adjusted rate mortgages, no, there's no incentive to do that. I do believe that we will see that shift at some point probably once they really figure out what to do with the conservatorship of Fannie, Freddie.

Again, this gets into the weeds so I'll abbreviate, but '08, '09 crash. Dodd-Frank all of those elements is when we saw that inverted yield, adjusted rate mortgages, interest rates went up, 30 year fixed low, don't even look at the adjustable. Once we start to really look at how to release Fannie, Freddie from its conservatorship that they were put in back in 2010, I think it was, I think that we'll start to see those adjustable rate mortgages make a play again in the open market to where it does make sense to consider if the interest rates are that 0.375% to 1% plus lower than a 30 year fixed counterpart.

Kathy: Now, I had read, and I think we did a story on it that there was less funding available through Fannie and Freddie or the requirements were getting stricter for investment properties. Is that correct?

Caeli: Not that I'm aware of. As a [unintelligible 00:19:25] you mean? Not really.

Kathy: No, it was at banks had a maximum number of investor loans they could do, something like that.

Caeli: There's probably something, maybe if you've heard, there's are things called overlays. Overlay is just an added requirement or risk to what the already predisposed guideline, Fannie, Freddie guidelines says, There's something called the seller's guide that Fannie, Freddie published. This is a 1400 page document that, within crazy detail, told us [00:20:00] exactly what the loan has to meet in order for it to be insurable by the United States government.

Ridge, because we're so investor-friendly, we go straight by the seller's guide. A lot of banks out there are going to impose these overlays that add into, for layers of risk, a maximum number that they'll finance for one individual, maybe it's 4. The rule is 10. Fannie Freddie will allow up to 10 finance properties per qualified individual.

For husband and wife, for example, one of the things that we coach or counsel is that if they can, we want to qualify them separately from each other independent so now we have 10 golden tickets, we call them golden tickets, highest leverage lowest interest rate, so that they can maximize those spots. I think that's one of the things value-add wise that that Ridge does for its clients is it's looking for education and teaching them how to optimize qualifications and what to look for.

Tennis is what Fannie, Freddie says. We don't stop at 10. We've got a whole diverse menu of loan products for investors that go well beyond, but that's what the actual guideline says and we don't impose those overlays.

Kathy: That's fascinating. Let's say a family, maxes there 10, the wife and the husband have now maxed out. They have 10 each or it's a single person who's reached their 10 limit. What are their options today and are they expensive?

Caeli: There are several. Two, to be specific. There's something called non-QM. Fannie Mae and Freddie Mac are defined as QM, qualified mortgages. Everything outside of that box is now non-QM. Non-QM in it of itself is very diverse. It's not just for investors. It's for anybody, really, that just doesn't fit into that box. There are no limits to the number of finance properties an individual can have using non-QM terms.

Just specific to this piece, non-QM has a whole variety of things for investors, [00:22:00] but this one just as it means that you have maxed out your Fannie, Freddie 10. Guidelines are pretty much the same. Qualifying guidelines, if it's full doc, income debt to income ratio, assets credit, very similar, leverage is pretty similar. 75%, 80% leverage, 30 year fixed. The difference is going to be rate. The costs are going to be the same. It's really going to boil down to rate.

Right now it's about a point difference between Fannie, Freddie and, let's say, a non-QM. If you're 4.25% on a Fannie Freddie loan, you can expect the non-QM to be somewhere around 5.25%. Otherwise, it's the same.

Kathy: Which is really helpful. I know you've helped a lot of our members who are in the middle of a 1031 and they forgot about this detail. They have to get another loan on the replacement property and maybe they've already maxed out with Fannie and Freddie. They come to you and you fix that problem. You get them the loans they need.

Caeli: Yes. That's true.

Kathy: That can be stressful. Plan ahead if you're doing a 1031. [chuckles] Any other tips for investors when it comes to leverage?

Caeli: I would say plan ahead is a great segue to close out the conversation. Planning ahead, make sure you get pre-qualified in advance of getting out there and starting to make offers. You want to get your financial debts in a row. Again, Ridge is really going to focus on educating you and teaching you, not from, real in-depth levels, but baseline stuff so that you understand the mechanics. What's going on in the black box of underwriting guidelines, how it applies to you, and certainly the goals and taking all of that and understanding what moves not to make. Because you don't know what you don't know and having some of that baseline information, I think, is crucial to your overall success.

I want to leave people with that and we really focus a lot of our attention on [00:24:00] that education. That's why I like your platform too, Kathy, because you guys are educators and it's just so important. Somebody getting into real estate investing just on its own without even the financing part added in, they're drinking through a firehose. That's the analogy that I give. There are a lot of moving parts. Just taking some time to educate yourself and aligning yourself with educators is just so, so important. I'm grateful for you and that platform and Ridge follow suit.

Kathy: Absolutely. I see too often people who have a toe in the water, maybe a real estate agent that just works very, very part-time and they think they know everything [chuckles] and they may be talking about something that was true 10 years ago. We really want to get the education from somebody who's active. Who's very, very involved with what's going on today and has been doing it a long time. That would be you for sure. It's a family business, right? Your dad did it before you, so you grew up in it.

Caeli: That's right. Second generation. Dad is retired now in Southern Florida, Santa Rosa Beach, the panhandle, and living life. I took over.

Kathy: You're still in Oregon.

Caeli: Yes, our corporate offices are in Oregon, but for those that maybe don't know, we're licensed nationwide.

Kathy: Yes, that's right. You can help people get loans definitely in all the markets that Real Wealth network has been involved in. Caeli, always a pleasure to speak with you. It's so great to connect. It almost feels like we're in the same room. Thank you so much and have a wonderful rest of your day.

Caeli: You too.

Kathy: Thank you for joining me here on The Real Wealth Show. You can find out more about the various lenders that we work with and resources under our resources tab under our invest tab at realwealthshow.com. There you'll get referrals to people with the kind of experience that you saw with Caeli today and also property teams in some of those strongest, fastest-[00:26:00] growing markets who acquire the investment properties, get them to rent-ready condition, or build them brand new and provide ongoing property management for our members who want to own rental property out of state.

Again, you can get more information@realwealthshow.com. I'm Kathy Fettke. Thanks so much for joining me. We'll see you next time. Bye-bye

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Voice Over: The views and opinions expressed in this podcast are provided for informational purposes only and should not be construed as an offer to buy or sell any securities or to make or consider any investment or course of action. For more information, go to realwealthshow.com.