Should I Refinance My Home Since The Rates Have Fallen? MortgageMinute

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Well, good afternoon everyone. Welcome to this week's Mortgage Minute. My name is Art Alvarez with Mortgage Works where we have the answers and they're on the house. Coming to you from beautiful day in the Palm Springs and greater Coachella Valley area. We got the kind of weather now in the fall where yeah, it's a little on the toasty warm side right around the 90 degree mark, but it's a dry warmth, heat I guess you could call it. But the nice thing this time of year is we get down the low 60s so we can definitely feel, feel a little chill in the air later into the evening. This is the kind of weather, of course, that brings all of our snowbirds into the area, which of course, we're just about to embark on the season that starts now. And of course once we get through the fall and through the holidays and it really picks up steam going into January. So for those of you already back from wherever it is you reside in the colder parts of the country, welcome and we'll see more of you as the, as the months go by. And of course I'm excited about mentioned last week. I typically comment on sports. It's the baseball playoffs. So I'm trying to keep my nose the grindstone working and not peek too much on what's going on in terms of the scores. Last I checked, Detroit was leading Cleveland 2 to 1. So you know, that's kind of what's fun about the baseball playoffs is we end up having some day games even during the week, during the business week. So we'll see how all that plays out. Dodgers, of course, already won their wild card.

Games and waiting for their next opponent. I'm gonna pick the Phillies though, to go all the way. So we'll see how that plays out. So with that, let's go ahead and get into what's going on in the mortgage and financial markets, in particular the bond market. First, let me show you our rate grid. And again, continued good news. Rates are down, of course, we've been down for quite a while. But if you go to our rate grid on our website, what you're going to see is we're right around the 6 a little bit under 6% for conforming 30 year fixed temporary buy downs. Both the 2:1 and 3:2:1 are starting at 299 and 399 respectively. FHA VA again right around mid 5, 5 and a half. So rates are very, very good, relatively speaking. I know a lot of you think rates are still too high, but as I've mentioned before Historically, rates are actually in a, at a very good level and below, believe it or not, what the average conforming rate has been over the past 50 years, which is closer to 7%. So in that respect rates are truly pretty good. So it's all about attitude. The bond market. Actually, after we talked here last couple of weeks, the Fed lowered the fed funds rate a quarter percent. Most everyone led to believe that that was gonna have an immediate impact on mortgage rates. It did not. I mentioned a couple weeks ago that when the announcement was made briefly, the 10 year yield dropped below 4, got down to 399 by the end of that day. Actually it ended up right about where we're at now, 4.08. And last week we were at the 415 to 418 range. As you can see from that chart. That's a five day chart goes back to last Friday where you can see that higher level in the four teens. And now you see that trend downward up until today, 4.08. So you know, that's good news. I mean the point of it is mortgage rates did not get better after the Fed rate cut of a quarter percent. They actually got about an eighth worse. Now that's starting to settle down and we're getting back closer to that important 4 to 4% threshold. Would love to see the 10 year bond yield get back under 4. That would certainly help with mortgage rates and might give us another eighth improvement, maybe a little bit more if we can get well below 4. In terms of what's going on in the markets this week, it was actually supposed to be a pretty important week because the data points to be released this week were predominantly about the labor market. And I've talked before about how the markets shift in terms of focus. Inflation, then the labor market. Labor market back to inflation. The labor market seems to be more of focus. But this week we have this little problem that just started a couple of days ago. The government shutdown. So as a consequence, some of the economic data points to be released are delayed. So let me go ahead and talk about a few other data points that are, have been released this week that I think are of some interest to you. First one, pending home sales. Pending home sales. Now what is a pending home sale? Pending home sale is where you have a listing that has gone under contract. And of course they call that pending because the idea is it's no longer an active listing. A offer has been negotiated and accepted and so escrow is opened in some parts of the market. They'll call that a pending Closing or a pending status here locally. The appropriate thing to do when it first opens escrow is you put it as active under contract and then once the buyer clears all their contingencies, they then change that status to pending. Pending at that point pretty much means it's going to close because all contingencies have been removed. So this week, pending home sales, that number was released again. This is a national number and it was up 4%. No, not gangbusters, but it's a good sign. I think the recent reduction in rates, that trend downward that was occurring before the Fed meeting I think has helped the purchase market a little bit. That's why you saw those pending home sales up 4% in August over the previous month of July. And that's a five month high by the way, in terms of pending sales. So that's good news. The Case Shiller index, again, I'm referring to the 20 city index, so of course, yes, a national number, although part of that index includes cities here in California. The story there is home appreciation is still on the rise, but now very slowly rising, very slowly.

1.82% annual gain in home prices over the past year. So it wasn't too many months ago that that number was more like 3, 4% plus. So yes, definitely the rate of appreciation of homes has slowed quite a bit, but it hasn't gone negative. And I think that's the important point to underscore. Home prices are still trending upwards in value, albeit certainly much slower than they were, but certainly not a disaster situation or a case where home prices are in a free fall like we saw, heck almost 20 years ago after the Great Recession of 2008. The other thing, talking about labor markets, one data point about the labor market that was released this week because it was released before the shutdown, Joel, that's a job opening. Labor turnover, it did come out 7.2 million slight up from 7.1 the previous month. But remember, that number not too many months ago was in the eights close to 9 million. So certainly what does this tell you? There's fewer workers quitting and businesses are filling less jobs. So yeah, there's a little bit of softness in the labor market, but I would argue nothing of super consequence in terms of worrying about something like a recession, which from time to time still seems to hit the financial pages in terms of headlines. Adp, they of course release job growth in the private sector only. ADP does not provide job numbers for public employees, only private sector. And they did see 32,000 less private sector jobs in September versus the previous month. And today.

Initial claims for unemployment was scheduled to be released. It was projected to be right around 220,000, but we don't have a number. The release has been delayed because that does come out of the federal government in terms of the data. And because of the shutdown, that number, that data point has been delayed. So we don't know what it is. And then tomorrow would have been a big day again, focusing on the labor market. Tomorrow scheduled for the US Employment and that is US Employment in terms of new jobs created, which includes both private and public jobs, public sector jobs, and then the unemployment rate currently at 4.3%. So if we didn't have a government shutdown, those would be two important data points that could have some impact on the market, on the bond market and maybe mortgage rates. But given that we're already certainly east coast time at the end of the day on Thursday, no sign of a government shutdown being avoided or stopped. So you can expect that data is not going to get released tomorrow. So as a consequence, it's kind of interesting for the markets, bond market in particular, kind of just hovering there in these low 4% range, not able to react to some of these fairly important data points. So we'll just have to see how that plays out through the weekend. Maybe we get some negotiations between the Senate and the Congress, the House of Representatives, and they come up with a deal and we can get this shutdown silliness over with sooner than later. I will say that in the meantime, the futures, the fed funds future market is pretty much 100% now betting on another quarter percent reduction in the fed funds rate in October. So we'll see if that does in fact come to play. If it does, it's certainly helpful. But that again, doesn't mean that we're suddenly going to see another quarter or even 8% improvement in mortgages. But it is a good sign and it will long term help us keep in that direction of, you know, slowly, you know, seeing a slow improvement in mortgage rates going forward. So with that, I want to go ahead and we're going to bring Jeff and we're going to have a little bit of discussion because one of the things, one of the things that has become top of point lately, refinancing, the media has been playing that up quite a bit, a lot of headlines about that. So we want to get into that in a little bit more detail. So I can give you my $0.02 on what's really going on as it relates to getting your Home refinanced. Hey, Jeff.

Hey, Art. I appreciate you letting us put this together. This, this image of you looking like, you know, that's. That's on top of mine. Like, that's a great question. Because when the rates go down, you know, and you've got a. You've got a mortgage that maybe has a little higher interest rate, that is one of those things that you kind of talk about over the dinner table, right?

That's exactly right. And there's been more conversations like that. And, you know, we. We have gotten certainly more inquiries about refinancing, and we are seeing more activity with refinancing. Although, you know, I got to tell you, it's all relative. Right? Because again, you'll see headlines about, you know, refinance applications have surged, you know, 30%, 40%, and not to be, you know, you know, the old saying, Debbie Downer. But, you know, you have to kind of keep that in perspective. I went back and looked at the mba, the Mortgage Bankers Association. They have a weekly applications index for both refinancing and purchase mortgages for both, and even a composite including both. And so I was looking specifically at the refinance index and the most recent one released just for basically the last week of September. And yes, it's up. I think the index value was right around 15, 1600.

But for perspective, during the. I call it the pandemic refi boom, the refinance index at that time, we're talking between 2020, about March of 2020, going into 21, that index value was hovering between 5,800 and 6,400. Wow.

Wow.

When you realize that that's how frothy the refinance market was just four or five years ago, 16, 15, 1600, compared to 58 to 6400, then you suddenly realize, yeah, sure, we've had an. A fairly good, relatively speaking, improvement in refinance activity, but it's nowhere near what it was during the refi pandemic. That's why, as they've been telling us for, you know, months and year, last couple years, so many homeowners have 2 and 3% mortgages because everybody and his brother was refinancing during that period. How could they not when you're seeing two, you know, rates under 3%. So. So, yeah, I mean, it's good news. Refinance activity is up, but we got a long way to go to get back to the good old days. In the meantime, yeah, there is some opportunity, although I will also point out, I would say more of this activity is related to cash out refinancing than just lowering your rate. Oh really?

Okay. All right. Well, you know, one of the things that you came up with this, the five key reasons you should consider refinancing your home between now and the end of the year. And I think the very first one is, you know, interest rates are significantly below the current rate. You know, if the interest rates are significant below the current rate. Can you, can you talk about that? Because we've seen, you know, we look at the, we look at the bond chart and it's up and down, but we look at it broadly and we're saying it hasn't been a lot of change. But yet I have noticed like, you know, 4.08, that's, that's pretty low compared to six or eight months ago.

Right. I mean the 10 year bond you look, and I always point out is your best benchmark to follow if you want to kind of just get a general idea of the trend in mortgage rates. But that yield number itself is of course not directly related to a mortgage because there's a, the basic concept is whatever the 10 year bond yield, you're going to add some premium to that to establish where are the mortgage rate levels and it's usually going to be somewhere around one and a half, 2%. So when you're looking at a 4.08 bond yield, 10 year bond yield, then it's no surprise that 30 year mortgages are hovering right around six low sixes. You know, we're at basically a little under 6, about 599. The Freddie Mac serve weekly survey I think recently came out. The most recent one was actually an uptick to about 6.3. But the point is, yeah, that's where the, the relationship is. And you know, there has been, I mean, granted since the pandemic and when rates shot up from twos and threes up into the, not just sixes but into the sevens. And remember it was what, two years ago, two and a half years ago, most mortgage lenders were over seven and there was some fear about going to eight. During that period there were still people buying homes, albeit a lot less people buying homes. And of course those folks who did buy homes in 23 or 24, maybe early 24, and if you do have a rate that's maybe in the low sevens or even the high sixes, that's why there is more focus now on refinancing because they think there's an opportunity. Now part of that is generated by, you know, the gotcha headlines and the surging in refis and rates have plummeted. And so homeowners are checking in with people like us to find out, hey, I hear rates have dropped and that I should be looking to refi. Well, then what happens is the discussion gets into, well, what's the rule of thumb as to when is the right time to refi? You know, is it you need to have at least a 1% improvement in the rate or 1 1/2% or a 2% improvement in the rate? So that's the kind of conversation that we're starting to have. And that when people call looking to refi, that's what they're being led to believe is that there's some kind of rule of thumb out there, that in order to do a refi, for it to make sense, you have to achieve some specific amount of improvement in the rate. And if you're not there yet, well, then, gee, I shouldn't even bother looking into it because I've heard that I've got to be 1% lower. And if I'm at 6 and 3/4, and if rates aren't at 5 and 3/4, well, then I shouldn't do it. I mean, that's the, that's a kind of common attitude we hear out there.

Well, what, what, what is the, is there a more, I'm not going to say rule of thumb because we already talked about that and kind of dispelled that. But is there a guide, like when you're talking to somebody, is it more than just, hey, what is your rate?

Well, yeah, I mean, I think that the.

This rule of thumb about certain specific amount of improvement has to be achieved in order for it to make sense. It's kind of outdated. And the reason for that is it has to do with, I think, how the mortgage industry has changed. Now I have, I guess I'll call it the benefit of remembering when 40 plus years ago.

How were refinances done and how did homeowners approach that transaction? It was entirely different. For one, when I first got in the business in the early 80s, the idea of getting a mortgage rate at zero points was kind of a foreign, you know, situation. I mean, it just wasn't common. When you got a mortgage, it was almost assumed that you were going to pay probably at least a point to get that loan. And that's kind of where the, I think the origination of the idea of you have to meet a certain level of improvement in rate to justify the cost. Well, if you're. Because if you're going to pay a point just to get the rate, and then on top of that, you've got your typical closing costs, you know, an appraisal, although appraisals 40 years ago were a lot less than they are now. You know, a credit report, which, again, not much compared to now, but, you know, escrow and title fees, when you put all that together, yes, you had a higher amount of closing costs that you're going to incur in order to get that lower rate. And so, yeah, that did sort of kind of mandate that you had to have a fairly significant improvement in rate to justify doing it, to justify the cost. What's happened is the refinance transaction has become much more streamlined, it's much more efficient. And, you know, these days, and this has been true now for many years, the predominant way you get a mortgage, whether it's a purchase or refi, is you get a rate with no points. It's not common for a borrower, whether you're refinancing your home for sure. And even if you're buying a home to pay points to get the mortgage. And so with that kind of innovation in how mortgage rates are offered to borrowers, that's driven down the cost, the overall cost of refinancing your loan. And so that's why it can make some sense to refinance, even if you're not going to achieve, you know, that at least 1% or at least 1 and a half or 2% that's no longer applicable. I don't think that that rule of thumb works anymore. It's always going to be better to talk to somebody like us. We'll ask you some questions, we'll crunch the numbers and then we'll show you, you know, does it financially make sense given your current situation as well as what your future plans are going to be?

Well, so are you saying, hey, if I'm on the sidelines and I might have a rate that is 3/4 of a point higher than, than what is being offered, that I shouldn't just ignore it, I should give you a call and say, hey, is it, does it make sense now? Because as you say, these, this 1% or 2% is really outdated.

It is outdated. So, yeah, you should have that conversation. I mean, I would say, basically, if you're hearing, if you're a homeowner and you're hearing, and you've probably already heard the noise, I'll call it the noise about there's this refinance, there's this refinance Opportunity now available because rates have dropped, you know, rates have plummeted. You know, I think it's worth looking into it. And I would say if you're a homeowner with a conforming rate of say anything north of six and a half, it's probably worth a conversation. And certainly if you have an FHA loan, I would say if you're somewhere in the even low six or six and a quarter to six and a half or higher, you certainly, as well as va, you certainly should have that conversation as well. Wow. Because what, what in that conversation though is still going to, it's still going to focus on what's the cost to refi and how long is it going to take to recoup those costs in the lower monthly payment that that lower rate is going to provide me. And then in that conversation, one of the things that comes up that I want to kind of mention is you're going to end up getting into a conversation about the refinance at no cost versus the refinance at no point Dubai and what I mean by that. And we don't hear it much anymore, but certainly during the last pandemic refi boom, there were some mortgage companies out there who focused specifically on refinance transactions and they would promote the, what I always say, the quote unquote, no cost refi. And in fact, I saw a local competitor here in, in our market who was promoting this again, the idea of hey look, you don't need a 1% improvement in rate. The example I saw was someone who had a six and three quarter rate and they were, it was being suggested that they should consider getting a refinance done. Now at a 6 and 3/8 rate, the 6 and 3/8 is only 38 less than 6 and 3/4. Right, you go, does it make sense, given the cost involved, to only improve your rate by 38 of a point? Well, the pitch involved the, again, I put it in air quotes, no cost refi. What does that mean? Well, what it means is that six and three eighths, that's actually not what a zero point rate is right now. Or that's available again on our, you just saw it on a rate grid. Or if you haven't, go look at our rate grid, we're at 599. So why would it make sense to take 6 and 38 and refi out of your 6 and 3 quarter mortgage? Well, because it's 6 and 38 the originator when offering that to the borrower, there's going to be what we call a net lender credit. Those are dollars that are going to be provided to the borrower to offset the non recurring closing cost to get the refi. So the idea is that 6 and 3 8, there's a premium in dollars that the originator applies to the appraisal, the credit report, the escrow fee, the title fees, the recording fees and all that can add up on a, you know, out here anyway, in our average loan amount, four or five hundred thousand, all that can add up to four grand. Well at six and three, eight, there's probably $4,000 worth of lender premium that gets applied to those costs. So you don't have to add it to your loan amount, you don't have to pay it out of pocket.

And so the, the pitch is, hey look, yeah, you're getting a rate a little bit above a current zero point rate, but that's because that creates a premium to cover all your costs. So it makes financial sense to refinance from 6 and 3/4 to 6 and 38 where maybe you save 150 bucks a month because it didn't cost you anything to do that. That doesn't mean the costs aren't there. It just means the originator is using the lender premium through a higher rate to cover the cost. Another way to put it is you're basically financing the closing costs into the higher rate that is still lower than your current rate rather than financing your closing costs into a little bit higher loan amount. So that's the pitch. Now I've always kind of fallen on the side of, I think it makes more sense long term finance your cost into your loan amount because you're going to get a lower rate than the 6 and 3 8. You know, I can, you know, I could probably get you 599 at zero points and that 3,500, 4,000 in closing costs, escrow, title fees, credit report and appraisal, you add that to your new loan amount but you end up with a much better APR because you're getting a lower rate at zero points rather than getting that little bit higher rate where you're financing the cost into the rate. But I've had homeowners who say no, no, I'm a no cost, that's the way I want it and I'll do them. But I usually feel like you're better off, go for the lower zero point rate and finance your costs into the loan amount. I do have also this belief that those originators who offer the no cost refi, where you get that Little bit higher rate I think is a little bit self serving. Because what they'll do is they'll say look, I've got all your information after we do this one. So if rates fall another 3,8 of a percent, call me and we'll do it again. And so what happens is you end up refinancing maybe two or three or four times and getting 150 bucks savings each time. If rates are trending down over a long period, rather than maybe you can refi a couple times if you didn't hit the low point the first time with a zero point rate refi. I don't know, I just feel like it's know more self serving to the originator because they're looking for future refi. That's why too, when you're getting a purchase loan, from time to time I'll hear that I'm talking to a borrower where one of our competitors will say to them, hey look, let us do your purchase loan and then we will provide you in writing an opportunity to get a no cost refi later. Well, what they're not telling that borrower is that's a little bit of a gimmick because yeah, they'll give you a refi for free, but they're going to offer you a blow or above market rate to create that premium to pay your cost. Pay your cost for you out of the rate, not out of, not added to your loan. So it's a little bit of a gimmick. And then the last thing I'll point out in terms of the cost recoupment issue is you got to be careful in looking at having an impound account because if you're going to impound taxes and insurance, that really muddies the waters because there's advance funds you have to put up to close the refi if you're going to continue having an impound account. And that gets confused into thinking that that's part of your closing costs. And it really isn't. It's just a future. It's an advanced payment on your future insurance and property tax liability. And so you're just providing funds up front to set up the new impound account. And so you have to make sure you don't perceive that as part of the calculation of recouping your cost because that money is not fees that are being charged to you for that transaction. Plus the fact you don't want to forget that when you're setting up a new impound account and paying off a loan with an existing impound account. When that loan's paid off, whatever money was in your existing impound account will come to you as a refund within a couple weeks after closing.

You know, you talk a little bit about recouping costs and I want to talk to you about, from a standpoint, because this is item number two, and I'm sure you counsel people, it's like, should I refinance if I'm going to stay in a home only or if I'm going to stay in a home this long? Because is it more of like, if I'm going to only be in the home like two or three years because I'm going to be moving or I've got children on the way or whatever it might be, do I look at that recouping the cost or just initially, hey, it saved me 150 or 200amonth in, in my monthly payment.

Yeah, I mean, that's always a little bit of a tricky one. I mean, we, you do have to have that conversation because that's important. If, if you have a sort of a high degree of certainty that you're only going to be in that home for say, let's say it's three years, I think it does make sense to consider is that refinance transaction going to give you that financial benefit in terms of a lower rate and lower payment.

For enough of a period of time to make it worthwhile for the cost. Now, of course, that again goes back to this no cost refi versus the no point rate refi. If you know, the originator will say, well, look, it didn't cost you anything to go from 6 and 3/4 to 6 and 3, 8.

So you should do it even if you're going to move in a year because you're going to get 12 months worth of $150 a month savings.

It sounds compelling.

It sounds compelling. And a lot of people do that. And again, it's more of a philosophy thing. I mean, I'll do them, I have done them. I usually try to have a mild debate with the homeowner about it. But if they're really, really certain that they're going to move in a very short period of time, yeah, it may make sense to do that no cost refi, where you take a slightly higher rate so that you're at least not adding to your loan balance. If you're going to turn around and, you know, depart from that home by selling it and then you're going to, obviously that's part of that's going to be paying off that that mortgage, that new mortgage. So, yeah, I think that is an appropriate analysis to go through. But the other thing I'll, I always tell people is, look.

To use the baseball analogy, life can throw you a curveball and you may be certain you're going to move in an 18 months or two years. And you know what, lo and behold, five years later, you're still there. So you have to put all that into your, you know, put it on the Ouija board and, you know, have a seance and figure out, you know, what, what's really going to happen here and kind of make your best educated guess and then approach the refi accordingly.

What about when it comes to, you know, talking to somebody says, well, you know, and we see ads out there everywhere of like, okay, you've got all this equity in your home. Now is a good time to refinance because you have a lot of equity. Is that, is that really a compelling factor?

Well, yes and no. One of the things about once you've developed all that equity and one of the things that will happen is the homeowner may feel like, well, since I have all this equity, it may provide me a couple of things. One is it may provide me the ability to have an easier time getting qualified for the loan simply because I've got all this equity now, Gee whiz, I'm only, I only need 400,000 and my home's worth 900,000. Now when I bought it for 700,000, shouldn't that mean that getting this loan should be easier and I don't have to do all this paperwork and all that? No.

It'S kind of analogous to those who still think, oh, if I'm going to buy a home and I'm going to put 30 or 40% down, gee, won't it be easier to qualify because I've got a big down payment? Doesn't that large down payment alone just kind of automatically mean I'm going to qualify? No, it doesn't work that way anymore. I mean, it never really did, frankly. And so, yeah, you should not think of having all this equity is going to certainly benefit you in terms of easier to qualify. We are, and have been since 2010, very much still in the ability to repay situation. You've got to provide lots of documentation. We've got to establish what your stable recurring monthly income is. You have to meet a debt ratio. So that's true whether you have 20% equity or 50% equity. The other thing that folks think, and this really comes into play on a refi is they think because they have all that equity that they can, that they'll have more leverage with the lender, that they'll be able to extract from that lender a better rate, that they'll be able to negotiate a better rate. It doesn't really work that way. You don't, you don't negotiate a rate per se. Although I still see some financial writers out there write articles about, yeah, yeah, you got to negotiate with your lender and don't just take their first offer.

That's not so true really much anymore. I'm not sure it ever was. Where the increased equity will help you is how your loan is priced is going to be based on a couple of important factors. And yes, your equity position is one of them. Which is the more direct way of saying that your loan to value.

The lower your loan to value, it will affect the rate you can get. In fact, a lot of folks think that if you have 20% equity, or again, looking at the purchase market, if you put 20% down, you're going to get a better rate. Well, that's not actually quite true.

A loan that's got 20% down payment but less than 25%, how that loan is priced is actually a little worse than if you put 25% down. Wow. Or it's even a little worse if you put less than 20% down, like 15 or maybe even 10. Why? Because that lesser down payment, that higher loan amount now has private mortgage insurance coverage which protects the lender, which actually can help get a little bit better term terms on the rate. So what you want to keep in mind is if you're refinancing, yes, you can have the rate offered to you be affected a little bit by are you at 80% loan to value, that's okay, but you're going to get a slightly better pricing on the loan. I call it at 75 loan to value, not 80. And if you're at 60, loan to value or less, then yes, you'll get slightly better pricing on that loan because your loan to value is 60 or less. But that's not a function of negotiation. That's just baked into how the loans are priced with the federal mortgage agencies, Fannie Mae and Freddie Mac. So it is what it is. If you're already at 60 LTV, you're not going to get a better rate. If you're at 50, you're under that 60 threshold. So it is what it is. Now, the other component of that that I would argue is more important in terms of what kind of rate you're going to get on a refi, your credit score, your credit score has a bigger impact on conventional conforming loans as to what kind of rate you're going to get on a refi or a purchase for that matter. And again, the loan to value is another factor. So if you have a low loan to value and let's say your credit score is not that great, you can still get a pretty good rate because once you go under 60 LTV, most of the what we call price adjustment factors that are going to be charged for a lower credit score are waived. So case really where your benefit is going to be in a refi is the higher your score is, the better off you're going to be in terms of what kind of rate you can get. And if you're at a 6 under 700, you're at 680, you're at 660, 650. If you're fortunate enough to have so much equity that you're under that 60% threshold, then you are going to get a rate almost as good as if your rate, as if your score was 780. Because all those what we call prices, price adjustment factors for lower credit score are waived because you have so much equity. So that's really how it can work for you in terms of the equity position. But ultimately what's dominant in terms of what kind of rate you're going to get is the credit score.

Well, as you bring that up, that's that is that another compelling factor if, let's say, for instance, you know, a couple bought a home or someone bought a home and at the time their, their credit score was a 680. And I know you've done this before where you said, hey, I, you know, help them understand if they start improving their credit, that will definitely help them, not just on their mortgage, but a lot of other things. And then let's say a couple of years later they come back and you run their credit score and they're a 750, is that a compelling factor now? Is that a driving factor to say, hey, we should look at refinancing even if we didn't have a big, you know, a surge in dropping rate because didn't have to pay a higher rate anyway?

Exactly. Right. I mean, I think that's one of those kind of like subtle opportunities that we have currently for folks who were in a position where they had to buy a home, you know, sometime between say 20, 23 to end of 24. And then compounded with that, they had to maybe they got a job relocation and they felt the need they had to buy something. But their credit score was 650. And so that certainly would have affected what kind of rate they got on the purchase. That probably assured that they were going to end up somewhere in the probably at least sevens, if not approaching 8% or higher. Well, here you are a year or two later and if you got your financial house in order and suddenly you're no longer at 650, you're at, like you said, 750. Boy, oh boy, Even if you've only had that mortgage for a couple years and even if you haven't had established that much increase in equity.

You'Re probably going to see a more substantial improvement in rate, not just based on the amount of improvement in rates we've seen since you got your mortgage, but layered into that the further improvement in rate available to you because Your score is 100 points higher than it was when you got your purchase loan. So that's one little niche in terms of those homeowners out there who may have bought a home in 23 or 24, had a okay credit score, but not great, had to accept a higher rate because of that. Because on conventional conforming loans you can get pretty hit pretty hard on rate, especially if you go under 700 down to the mid sixes or even all the way down to the minimum that you have to have a 620, you can hit be hit very hard on rate. So if you were in that position in this last couple years when you had to buy that home and, and if you got your ACT together and your scores in the 7 hundreds mid or particularly if you're a higher 7 hundreds, you should be looking into that right away because again, rates haven't improved that much. But because of the score differential, you'd be amazed how much better rate you can get.

Well, you know, Art, we don't talk about that very much, but it's, you know, you think about people, as you said, hey, they still bought a home and their interest rate, or excuse me, their interest rate was high based on their credit score. And, and they probably, I wonder if they just, if they are almost discounting the value of just a little bit of time into improve their credit score. How much, how much counseling do you talk to people about that kind of thing? Do you have an opportunity to do that when you have someone you're closing loan and, and you knew they were at 6:60 or 6:50 and talk about the opportunity in the future that could.

Help them well, absolutely. I mean, that's got to be part of the conversation. Of course, with my experience, I'm, you know, I've seen, I've seen a few credit reports in my day and I have a pretty good feel for what's affecting somebody's score. I mean, I can't tell you how many times, you know, I'm pre qualifying somebody and, and they'll say, yeah, my score is okay, it's 650. But, you know, that's because I just talked to a couple other mortgage lenders and they pulled my credit and, you know, cratered my scores by 40 points. And I'm like, no, that's not what's going on. And of course, if I get an opportunity to pull the report, I can, I can pretty much zero in on what's going on, what has caused the score to be where it is. And so when I'm arranging that loan, that's one of the things I have to leave them with, is, look, let's get you into this situation. Let's get you into this home. You need to buy the home for whatever that reason is and we'll do the best we can to give you the best rate possible, which we feel like we do. Again, our lender paid comp is very low 1% on most mortgage programs. We don't charge any fees at all. So we're going to generally get somebody a better deal anyway, even a lower credit score level. But I always urge them, look, once you get into that home, you've got to work on taking some action. And I can give them specific advice, what action to take to improve scores and to the extent that they're open to it, I even have, you know, the, the benefit of a very good resource company called the Ascent Network who focus on credit, education, credit repair, and I referred many people to them where they are able to help those folks even further to get their scores up. And then the benefit of that is then you can come back, you know, talk to us again and if you are 80, 100 points better again, even if rates have not improved all that, you know, much since you bought, you could still see enough improvement in rate now that it could benefit. Doing that refi simply because of that improvement in score makes total sense.

Makes total sense. Hey, this last one is, this is number five of the five reasons why you should, you should consider refinance for the end of the year. They just want to change the rate. They've been in their home a long time and maybe they're considering going to A shorter loan term. What are your thoughts about that?

That's an interesting point and a very good one. Sometimes what we run into is somebody who starts thinking about a refi. But their, their fear is they don't necessarily want to go backwards on term. What I mean by that is they may have gotten a 30 year loan and maybe it is at, you know, it could even be a little bit better than the current market. Maybe it's a five and three quarters, but they got it 12 years ago, so they got, you know, 18 years to go on that term. So even if we see more improvement in rates where they're at now and get to the point where maybe they're starting to think about hey, should I refi? They'll say, no, we're not going to because we don't want to start over on a 30 year term. And actually that thought process even happens if somebody's gotten their loan three to five years ago. In fact, I just had a homeowner who kind of was in that situation and I pitched them on doing a refi of their first mortgage because they wanted to pull a huge amount of cash out and they didn't want to do that because they didn't want to start over on a 30 year term. And they'd only had their loan for about six years.

So there's a couple things that come to mind on that. Yes. For one, look at going shorter on term. Now of course the most obvious question we get all the time is well, what if I go from a new 30 or 20 loan I've had my loan for, I got it five years ago. Well, let's say six, seven years ago, I got an 18 or 19 when rates were in the fives. And I do need to get some cash out. But I don't like the idea of starting over on a 30 year term. So what we would look at then is offering them something shorter. Now the obvious thing they always bring up is well, what if I go with a 15 year loan? Isn't that going to give us a better rate? Yes, it will. Look at our rate grid, I mean the 15 year loans right now are like 5 and 3, 8, 5 and a half sounds pretty good, right? Problem with a 15 year term is it's only 15 years and for whatever your loan amount is, that payment's going to be substantially higher than the 30 year term simply because you're paying it off in a much, you know, half the time. So a majority of time when we bring up or asked about, we show them the rate for a 15 year, they're excited to hear what the rate is. Then when they see the payment, then you know, I've got to help them get off. They just fell out of their chair and I have to help them up. So. So that's the start of the conversation. But then what we can do is a couple of things. One is.

You don't have to get a new 30, but you don't have to go 15 either. Go 25. Oh, in fact then this is true on conforming conventional loans, not FHA or va. Most of the lenders we do business with, and this is pretty common in the industry is you can pick your term, you can say I want a 23 year term, I want an 18 year term.

Oh, I did not know that.

I want a 12 year term. Yes, you can do that.

Now in the midst of all that, one of my favorites which I try to bring up anytime somebody wants a fixed rate loan and they're a little hesitant going out 30 years. If they're doing a refi, they don't want to go back to that 30 years starting over.

And is the 20 year term. I think the 20 year term is a great option that people don't consider often enough. The reason is a couple things. One is a 20 year term in most cases is going to get you a little bit better rate than a 30 year.

Sometimes and it may not sound like much, but it's worth something. Sometimes a quarter three, eight is better in rate than a 30 year. Now it's not going to be as good of a rate maybe as a 15 year, but if you're going to get a quarter 38 better in rate over a 30 year. The other nice thing about the 20 year is the payment is much more tolerable than that 15 year. You'd be surprised but that extra 5 years in term makes a pretty good difference in payment. So the 20 year loan I think is that kind of sleeper opportunity that I think not just refinancing, you know, homeowners looking to refi, but even on the purchase market a 20 year term is really something more borrowers need to look at because I think it's a great combination of optimizing the kind of rate you can get, but then also paying off your loan faster, building equity faster, but being able to do that at a much more reasonable payment level. You're not forced into that pretty tough to choke down every month 15 year payment, but you're going to really whittle down that balance and create more equity a Lot quicker than that 30 year payment. So I think the 20 year loan really ought to be more in the forefront of borrowers in general, whether it's a purchase or a refi.

Well, I think this is great. This is five reasons, let's just recap those. One is when the interest rates are significantly low, what you had and the current rate, and then you plan to stay in the home a while so you can recoup some of those costs even for those no cost refis and you build up a substantial equity. Your credit profile, to me this is the one that stands out the most. Your credit profile has improved since you first bought your home. I think that's especially if it was in the mid or low sixes as you say, or you just want to change the loan term. I think that was another bright spot because I didn't even know you could say, hey, I want to pick my term of 12 years, 22 years, 25 that is, I mean because you always, we're always kind of used to saying you got a 30 and you got a 15. That's it. I didn't know those others existed. I think it's great.

Yeah, historically that's been the case. One other point I'll make, the other refi opportunity some people think about is you got a loan with less than 20% down, you got PMI and you want a refi to get rid of the PMI first. One thing I'll tell you is, yeah, that may make sense. I think you're better off if you're going to do that. Make sure you're getting an improvement in your rate too, not just removing the pmi. And the reason I say that is because if you've had that loan long enough, two, three, four years, even if rates or current rates are similar to what you have now, don't jump into a refi just to get rid of the pmi. If you're going to end up with a rate similar to what you have now, don't forget that you have the opportunity to request cancellation of your PMI without a refinance having to be done. Oh, again, PMI is private mortgage insurance on conventional loans, not to be confused with fha. So if you've had your loan long enough, again, minimum two years, but three, four, five years, if rates are similar to what you have on your current loan, don't just jump into a refi to get rid of the pmi. Consider requesting cancellation of the PMI with the company that is servicing your loan. And you may find that that can be done and you keep your loan where it is. Otherwise you keep your rate. And if current rates are similar to your current rate, you can avoid the cost altogether on a refi and still get rid of that PMI cost.

Wow. That's a super tip. Thanks for waiting. I'm glad I didn't say. Okay, thanks. Let's go for today. That's a great tip, Art. Thanks. Sure. All right. Well, thank you. I'm going to turn it right back over to you and we'll see you next week.

Okay. Thanks, Jeff. Thank you everyone for watching and listening to this week's Mortgage minute. My name is Art Alvarez with Mortgage Works where we have the answers and they're on the house. We'd be looking forward to seeing you next week on THE NEXT edition. In the meantime, have a great weekend and keep an eye on those baseball playoffs. So long. Take care.

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