With Tim Beyers, Mortgage Analyst with American Financing
Interest Rates and Their Effect on Mortgage Rates
Even though they had all but telegraphed their decision six months earlier, when the Federal Reserve nudged their benchmark rate up by a quarter of a percent at the end of 2016, it prompted an immediate torrent of news stories and blog posts about the effect this would have on mortgage lending rates and the housing market.
While the consensus expectation is that US Treasury 10-year notes and 30-year bonds (which are seen as determining rates for mortgages) will inch up in lockstep with the benchmark rate, there’s more to the story. Steve’s guest Tim Beyers, a Mortgage Analyst with American Financing, explains that there are two types of mortgage rates: fixed and variable. Fixed rate mortgages are unaffected by changes in Federal rates, but variable rate mortgages usually float based on what the current 10-year note is yielding. Adjustable rate mortgages (ARMs) are the most common variable rate loans and are most directly affected by changes in interest rates. As some ARMs offer a “teaser” rate for 7 years, others reset after a year. The devil here is in the details.
Both fixed or variable rate loans can be refinanced at a new fixed rate if the mortgage holder meets certain financial criteria. This basic premise holds true for new mortgages as well—the borrower’s financial situation plays into the rates at which banks are willing to lend to the buyer. In Beyers’s opinion, the recent 0.25% increase in Fed “funds rate” and an additional 0.25% rate increase—which the Federal Reserve has indicated it will make in 2017—will not affect home buyers very much. It will affect 10-year and 30-year rates, which again will go up in proportion to the benchmark rate, and will also fluctuate based on longer-term expectations of the economy as a whole. Steve and Tim agree that while we have no influence whatsoever on interest rates set by the Federal Reserve, we can control to some real extent the mortgage rates we are offered by improving our financial position vis-a-vis credit scores, debt, and the size of our down payment.
Credit Score Needed to Buy a House
Whether you’re considering refinancing a mortgage or you’re buying a home, it’s critical to understand the effect of your credit score on mortgage rates. Lenders will undoubtedly zero in on this number— also called a FICO score—as it is seen as the single most important factor in evaluating your ability to pay back a loan. The interest rates you will be offered will vary depending on your credit score. Credit scores typically run a scale from 500 to 850, and a score north of 740 is going to put you in a strong position to receive good rates. Obtaining credit score reports from the three major agencies can take time, but the law requires that agencies provide this information to you once a year at no cost. The website to get these reports is annualcreditreport.com. In addition to the headline FICO score, the agency reports will provide details about loans, revolving lines of credit (credit cards) and bankruptcies. If you find outdated or wrong information in these reports, there is a process to correct it which involves sending a letter and supporting documentation to the agency. This should take about 30 days. Also noteworthy is that after seven years, delinquent loans and bankruptcies are automatically deleted from the report.
Mortgage Hidden Costs
Steve remarks that many home buyers fail to grasp the full costs of buying a home including, of course, the mortgage itself, but also “hidden expenses” related to repairs and maintenance among other items: fixing a roof or air conditioner, spraying for termite, etc. Tim recommends that home buyers first use a mortgage calculator like the one found on his company’s website (https://www.americanfinancing.net/mortgage-tools/calculators) to get a better idea of what their monthly payments might be under different scenarios (down payments, interest rates, maximum loan totals, etc.) After this exercise, Tim suggests talking to a professional like a financial advisor or accountant about these numbers as well as the hidden costs Steve alluded to.
Speaking about his own company, in which the mortgage consultants are paid a salary rather than a commission based on sales, Tim describes the process they follow of walking clients through optimal solutions to their particular situation. Steve concurs on the necessity of finding an advisor with no conflicts of interest and adds that you have to look out for such conflicts and seek a flat fee based financial planner who is only interested in helping you make good decisions and grow your wealth, not in leading you to make transactions that earn them extra fees and commissions.
Shopping Around for Best Mortgage Rates
Steve mentions that he’s seen very similar mortgage rates advertised at local banks and more competitive rates online. He asks Tim about the best way to shop around for the best mortgage rates. Tim’s answer is surprisingly simple: Google mortgage rates for your zip code and check out mortgage rate aggregator sites which show you rates offered by various banks on. This information can be plugged into a mortgage calculator where you can again get monthly payment schedules for different kinds of mortgages (30-year vs 15-year) and rates. There are potential complications like teaser rates and discount points that can work in your favor or against it, which, again, underscores the importance of reviewing these details with a professional.
Steve Pomeranz: My guest is Tim Beyers. He’s a mortgage analyst at American Financing. American Financing is a company that uses salary-based mortgage consultants instead of commission-based. He’s here to talk about what to do if you’re thinking about refinancing in light of the fact that we’re starting to see a tick up in mortgage rates. Welcome to the show, Tim.
Tim Beyers: Thank you so much, Steve. It’s a pleasure to be here.
Steve Pomeranz: Tim, the Federal Reserve is in motion to raise interest rates this year, they’ve already done a little bit of that. That’s going to affect certain types of mortgages; everybody thinks it’s going to affect all mortgages. I think when the Federal Reserve moves it only affects certain types of mortgages. What types of mortgages will be most affected?
Tim Beyers: Yeah, and there are two types. There are fixed-rate mortgages and there are variable-rate mortgages. If you’ve done any financing, if you’ve bought a house, you may have bought with what’s called an ARM, which is an adjustable-rate mortgage and that’s the most common variable-rate mortgage. Those are the ones where the rate can move according to how the average interest rate changes. Like you were saying Steve, the Federal Reserve sometimes will raise the rate that it costs for a bank to borrow money, and, so when that happens, the mortgage rate can go up. Those ARMs tend to be a little bit more affected. Sometimes you get a very short term ARM, something like a year, or you can get it for up to seven years. Usually, it’s the variable-rate mortgages that are a little bit more affected, but if you’re buying your first house right now or if you’re refinancing, it may get a little bit more costly than it was last year, but it shouldn’t move too much.
Steve Pomeranz: Yeah, so you have these two rates, the variable and so it’s adjustable. That word is in there; the word variable is in there. That should be an indication that it’s going to be tied to some index, some short- term movement in interest rates, and that’s exactly what the Federal Reserve can control. Fixed mortgages are mostly based on longer-term bonds, which are really not affected by the Federal Reserve. What affects then the interest on this ten-year, or these longer-term bonds, which then affects the fixed mortgages?
Tim Beyers: Well, I mean in those cases, it’s a bit more…a longer look at the economy and the overall state of the economy. More often than not, when you’re looking at say a 30-year mortgage, if you’re trying to get into a house on a 30-year mortgage, the principle thing that’s going to affect your interest rate is your own personal financial economy, your own personal financial health—things like your debt, do you have a good credit score? Are you putting very little down on the house or are you putting a lot down on the house?
Steve Pomeranz: Maybe too many of us spend too much time thinking about what the actual interest rate’s going to be, which is out of our control, but there’s a lot that’s in our control that will have more of an effect on interest rates. That’s a really interesting way of looking at it. My guest is Tim Byers, he’s a mortgage analyst at American Financing. If you’re considering refinancing today, to lock in today’s low rates, what are some of the first things that you should do?
Tim Beyers: Well, you certainly want to check your credit score. This is one of the most important things you can do. The higher your credit score … Think of it this way: a bank is in the business, or even if you get a government backed loan like an FHA mortgage, the better credit risk you are, the better financial deal you’re going to get, which means a lower interest rate, maybe more generous terms. Check your credit score. Usually, the best deals go if your credit score is up above 740 and a credit score usually runs between 500 and around 850. If you’re in that 740 or above, you’re in pretty good shape for talking to a major bank or even a company like us, which will take your mortgage all the way through up to the point where it gets sold to a Wells Fargo or a Chase.
Steve Pomeranz: To get your FICO score, or this credit score, I notice that it’s on my bank statement now or when I go online there’s a section I can punch in to find it. What are some of the other sources for getting your credit score? What’s the easiest way to do that?
Tim Beyers: The easiest way is … Every year, the law does require that you get access to your credit reports. If you were to go to—I’m just looking it up here—it’s annualcreditreport.com, and that’s a government site. You’ll put in your information; they’ll verify you are who you say you are, and then you can get your credit reports from the three major agencies; you can get your credit scores, and that’s free. You can do that once a year. Also, if you use Mint or another personal finance package, you can get your credit score through them. Often times your credit card provider, Citibank and American Express right now will do that. There’s a lot of different ways to get it, but do keep tabs on it. It’s an easy way to see where you are from the perspective of a banker.
Steve Pomeranz: All right, so once you get your report, once you see your FICO score, what’s the first thing that you should do when you’re looking at the report?
Tim Beyers: Well, when you’re looking at the report, look for anything that looks out of place. Let’s say you see you had a loan ten years ago, or like your car loan ten years ago. For some reason on that credit report, it shows that you’re delinquent or something that’s erroneous about that on your credit report. There are steps you can take and usually, it’s just writing a letter to that credit bureau and saying, “Hey look, this is incorrect. Here’s the title I have of my vehicle, I’m not delinquent on anything. Please remove this from my credit report.”
Steve Pomeranz: How long does it take for something to actually come off the report?
Tim Beyers: Well, it can come off automatically after seven years, that’s usually why they say if you have a bankruptcy, wait seven years until you do anything more serious credit wise. Seven years if you do nothing, but, if you take action, it can be as little as 30 days.
Steve Pomeranz: Yeah. Once you’ve gone through your credit report and you see that it’s clean or you’ve written your letter and it gets cleaned up. I think a lot of people…they go in to buy a house, but they don’t really have a good sense of their whole financial picture to see whether “Can I really afford this house.” There’s a lot of hidden expenses when you’re buying a house; it’s not just about the mortgage, that’s for sure. I live in South Florida and there’s air conditioners and roof and problems and all of this kind of thing. Termites, some people have to get their places tented and the like. The bottom line is you have to figure out the whole picture, how do you do that?
Tim Beyers: Well you’re right; you got to know what you don’t know and that really is the trick isn’t it? One of the first ways to start first of all is go and take a look at a mortgage loan calculator. We have those at AmericanFinancing.net where you can see, if you’re looking at the price of a house, you can put in some numbers and get a rough estimate of what it would cost you on a monthly basis to get into that home and you can start thinking about it. After you do that, you really want to sit down with somebody who can walk you through all of those hidden costs you just mentioned, Steve. This is why we have salary based mortgage consultants at American Financing.
I’m tooting our own horn here, but, very briefly, the idea is that once you give us your financial situation, we take you through the process and then we’ll come back and say, “Hey, you know what? You have some debt and here’s a package that might be good for you to pay down some of that debt as you’re looking to get into a house.” You really want to sit with somebody, whether it’s a financial planner, maybe even just your accountant. We have, at American Financing, salary-based mortgage consultants who will do that process with you and so, because we’re not making money off of the size of your transaction, just whether or not you actually get into a house, we want to get you the best deal that’s best for you. Find somebody who can help you in that sense, who can kind of take a look at it from the broad view.
Steve Pomeranz: Yeah. I mean the idea of working with someone that has less conflicts of interest is always a very good idea. Where fee only financial planners are not interested in how you move your money around or whatever; they’re just interested in growing your capital and making sure that you can make good decisions.
Tim Beyers: Exactly.
Steve Pomeranz: Look for conflicts of interest. Here’s a question I have for you, shopping around for rates. When I walk into a bank and they’ll have a poster and it’ll say, “Here’s our current rates.” They all seem to be very close to me, or if I go online to certain sites you see them compete. What’s the best way to shop for rates?
Tim Beyers: Well, one of the best things you can do is just to Google search, quite frankly, and take a look at your mortgage rates, just look at mortgage interest rates and maybe put in your zip code and you’ll get to these aggregators online. Frankly, we can help you with that too, but just to give yourself a sense of what the various banks are offering out there. Then once you’ve got some ideas, take a look and use those calculators to sort of see the difference because you do want to know on a monthly breakdown on what the aggregate is, what you’re going to pay if somebody’s offering you 4% on a 30-year mortgage versus 3.875% on a 15-year mortgage. How does that break down to monthly? Unfortunately, there isn’t any way to escape the math; it’s just those calculators, like what we have at the site, can really help you understand how the math shapes up on a monthly basis.
Steve Pomeranz: It’s a little complicated because low rates could be teasers; they could have extra points added to them to buy down the rate. You’ve got to become pretty familiar, really work with someone that you can trust who will lay it all out for you and say, “Hey, maybe this is a lower interest rate but here you’re paying a couple of more points, which if you’re staying in a house for X number of years that’s okay, as a matter of fact that’s probably to your advantage to pay points to buy down the rate. But if you’re not, hey, you probably want to pay zero points if you possibly can.”
The cost of money is the cost of money. All these institutions basically buy money at the same rate, and they have a little wiggle room on how much they’re going to sell that money for in terms of giving you a mortgage. So many moving parts that you really need someone to walk you through it. Unfortunately, we’re out of time. My guest is Tim Byers, a mortgage analyst for American Financing, and he can be found, and they can be found at AmericanFinancing.net. Hey, Tim, thanks for joining us.
Tim Beyers: Thank you so much, Steve. I appreciate it.