Predictions – commentary – advice for 2021 Mortgage and Real Estate
It has been several weeks since I have reported on the mortgage market and the effect of Covid 19 this year. . We have been working 7 days and long hours since March when the pandemic took shape. The following is my opinion and overview of what I have seen. Combined are the views of many other seasoned professionals in the industry I associate with. With 20 years’ experience under my belt and the content posted in the last 4 reports, we have nailed it on all our predictions and insights. So, please take a few moments to absorb this very useful, vital content.
Up until June, as predicted in previous emails to you, interest rates have continued to fall. We had a huge wave of clients refinancing or taking cash out through June 2020, at the 3.25% to 3.375% range on the 30-year fixed. Also, the 15-year term was 3.0% to 3.125%. Since June interest rates have continued to fall through the month of November. Home buying and refinancing are at an all-time high. The highest it has been in the 20 years I have been doing mortgage financing.
Last week with the government buying up more and more bonds, we have seen another dip in interest rates. Today I have seen rates at 2.75% on a 30 year and 2.5% on a 15 year. Of course, this is with good credit and other variables. But what seems to be going on is that the uncertainty in the market is driving down rates once again. New government spending and tax hikes discussions, and truly tested vaccines are the biggest market uncertainties that will control the market in 2021
Psychology of Interest Rates and the games it can play on the borrower
One topic that drives me nuts. Clients calling and asking for help. They searched the internet for interest rates and found some internet company. They are promised some ridiculously low rate. 60 days into the transaction the lock term expired, and the company can no longer honor the interest rate. Also, when I ask the client to send the loan estimate, I find additional costs in the form of discount points were assessed. Clients were coming to closing with more money than expected or promised. And after a detailed conversation with the client, their payment and long-term financial objectives were overlooked. Cash to close objective was not met. The timing of closing the transaction was not met. Thus, they called me.
People, when considering a purchase or a refinance of any type, watch out for the bait and switch. That lowest rate in the world made you take action. That is very good marketing on the mortgage companies’ part. When seeking a mortgage, are you looking for the lowest rate in the world? Or are you seeking a competitive rate with a very sound financial plan around it?
Seeking or shopping for the lowest interest rate in the world is like going to the drug store and buying over the counter aspirin to heal your headache. Working with a Certified Mortgage Advisor is more like going to the doctor and determining what is causing the headache. An in-depth look at your objectives, and understanding your options, will better heal the cause. By one bypassing a true mortgage professional in my opinion, is a prescription for disaster. Enough said here. I hope my point is understood.
Remember there are 4 conscious decisions you need to consider before you make a mortgage financing move. First, there is objective consciousness. What are you trying to achieve? I want a new home, maybe a lower payment, or reducing overall cash outflow per month? Consolidate debts, or lowering your interest rate? Not bringing any cash to close. I want to avoid PMI or mortgage insurance. I want to fix my credit so I may lower my rate or get approved for more. Are you looking for a longer or shorter-term? First, these questions must be not only answered but analyzed. How do we optimize your options before we pull the trigger on anything? This is the first conscious
Second and third, there is “payment conscious and rate conscious”. These go hand in hand. Example: If a lender puts you in a 10-year mortgage with a great rate, to meet your “Rate Conscious” objective, yes you have bragging rights of a great rate but your payment increases 40%, not meeting your “Payment Conscious” objective and or of reduction of monthly cash outflow.
An extreme example of Payment Conscious would be to get a mortgage for a 10% interest rate. Wow, that would be high would it not? But if for some reason it was amortized over 50 or 60 years, and your current payment reduces by 70% would you consider that? Yes, A high percentage of clients would as they could take those monthly savings and invest them in the market, pay off debt, and or better their lifestyle. Not worrying about paying down the principal so much but taking advantage of time and appreciation. No, they do not have 10% mortgages at this time, or 60-year terms but you get the idea.
Please get those brain cells firing on all cylinders. Remember we all strive to get the home paid off and prepare for retirement. Remember we want to have an enjoyable lifestyle as we march towards that goal of retirement. Life is short, and you may consider utilizing some very cool mortgage strategies to compliment your lifestyle and overall long-term goals and objectives.
Cash to close Conscious. If you are planning on no cash to close you need to understand something. Lenders have costs for appraisal, title work, closing fee, underwriting, and processing fees. Also, you have property taxes. In most cases here in Michigan you pay your property taxes in advance. So, at closing the lender will collect about 1 year of taxes and homeowner’s insurance at the closing. So, either you can come to the closing with closing costs, taxes, and insurance, or if there is enough equity in your home these costs can be rolled into the mortgage. So, your mortgage balance may go up. If you are dead set on not rolling in these costs, your cash to close objective may not be met.
You will hear of FREE or NO closing costs. Well if you know of an appraiser or title company who works for free, please pass their name along as I would like to hire them. Remember there is nothing free, and in the mortgage world, it is all baked into the interest rate.
Rule of thumb. For every $5000 you roll into the mortgage it will increase your payment by only about $21 or so a month. With that said if you have the ability to roll these costs or “settlement charges” into the mortgage it will not affect your payment so much and could nail down that cash to close conscious objective, we discussed So when you decide to take action on a new mortgage, all of these “conscious objectives” must be considered.
A good lender gets the job done. A great lender will take all these conscious objectives into consideration, as we design a mortgage in this low rate environment. The goal of meeting all of your short and long-term financial objectives utilizing very cool mortgage strategies available today.
In financial circles, I am associated with, and the experts I have been corresponding with, all indicators are that rates will continue at these current low levels for the next few months. So, nothing Earth Shattering here to make a move this very moment. I do believe interest rates will begin to inch up in the second quarter of 2021. I would suggest getting in line. After the holidays, give me a call, and let’s schedule an “Onion Peeler” as I call it. Layer by layer and examine your goals and objective to see if this current market can offer opportunities, to better your situation both short and long term. We need to understand your conscious level before you jump on anything. Or go here and apply so I have an open application to work all the numbers up if you decide to “pull the trigger”
The common statements being made are “those who obtained a mortgage in 2020 will be back in 2021 to take advantage of further rate declines”. So, take advantage of this moment in time.
Home sales are still through the roof and there is a huge lack of inventory. I am concerned about artificial appreciation in 2021 as we see multiple offers on homes exceeding the sales price. A report came out today from Barry Habib – MBS Highway, that 70% of millennials have, or are in the process of moving back in with their parents due to job loss, employment picture or not following financial discipline. As the economy struggles to regain strength this will be catalysis or pool of future homebuyers. Yes, they will buy, as soon as there is light at the end of the tunnel on the pandemic and the economy gains momentum.
However, this does concern me. I am concerned about clients buying with little or no money down, planning to live in the home for 3 years or less. This could be a bit of a shock to homeowners when rates rise, as market values tend to drop in a higher rate environment. This will slow the home buying market down. Sales would slow and values would decline and become a buyers’ market, not a sellers’ market we are in today. This could lead to these homeowners becoming underwater. Meaning they may be selling their home for less than what it is worth. Caution is key when educating new home buyers for 2021.
Affordability Even with the appreciation rate moving right along homes have never been more affordable. Back in 1986 interest rates were near 11% and that was paying 2 discount points. So ones thinking the prices are too high let me say this. If one to buy a home and have a mortgage of 200k last year at 4.25% APR the payment for principal and interest would be $1229 a month. Today at current interest rates that would get you a 301k mortgage. Hmm. Kind of interesting is it not?
All these factors must be understood as these buyers enter the market. Boy, I hope lenders do not just “SELL” a mortgage to these homebuyers but really sit down, and be a positive value-added part of their life, as they need good solid education and advice now more than ever. These buyers need not be sold but educated with solid strategies. They are in need of good foundational disciplines that will complement their long term life goals. My dad told me something I will never forget. “Vic, it’s really difficult to get rich quick. But it is very easy to get wealthy slow. Especially with real estate. Real estate, time, and appreciation is your friend. Keep your friends close.
I believe in December and January we will see a slow down in the mortgage and real estate market. Of course, this is a natural cycle during the holiday timeframe. With the Governor most likely to remain strong on keeping Michigan closed down through the new year, this will fuel the pent-up demand for housing early in the new year. Home sales will remain strong through the 3rd quarter of 2021. This will keep home prices at an elevated level and creates an opportunity for consumers to hit the reset button on any financial loss. They can reap the benefits of higher values to extract home equity to remedy any of the financial damage Covid may have created during the Covid 2020 period. It will be an optimal time or perfect storm for those who want to consolidate debt to lower that monthly cash outflow conscious. Remember I mentioned that time and appreciation is your friend? Let it be your friend here.
2021 will create a great opportunity for many consumers to regain financial control and prepare themselves for avoiding this type of situation in the future. Many lessons have been learned the hard way. Trusting employment, the system, and the infrastructure has forced many families to live paycheck to paycheck. Ones not having the proper emergency funds or mortgage financing strategies in place prior to Covid want to put themselves in a position to avoid a situation we have just experienced. Prepare for a tight time, never have a tight time my wife says.
Covid Changed me
You know, I never used to tip when I ordered take out food or another pick up or drive-through services. I certainly do now, due to my children. My kids are broke, going to school, working part-time when and if they can. Yet they give back to help others and they explained that to me. I see people working at these restaurants and local shops, not because they want to be there, but because they have to be there as they are in need of that money. They have bills to pay and families to feed. I applaud these individuals, as they not only work in the fear of Covid but demonstrate their diligence of doing whatever it takes to stay above water, regardless of Covid, or the Governors orders. It has changed me to be a better person in some way as I now have a completely different view. And it’s just another way of giving back. Sorry I jumped on my soapbox there.
Why will interest rates stay low until the 3rd quarter of 2021
Interest rates work in cycles. What drives interest rates up and down you may ask. Take a look at it this way. You go to Costco, Target, Walmart, the mall. Everywhere, the parking lots are full. As Americans stock up on essentials, food for home cooking, and the normal holiday gifts, puts a strain on the inventories. As millions are still unemployed due to Covid, remember a large percentage of these jobs are in manufacturing. So, as we shop for goods, personal necessities, automobiles, make home improvements, and other big-ticket items, this will put a huge strain on supply chains. As supply chains are strained, and demands for these goods increase, naturally, prices will increase as well. Have you priced out any lumber lately? So as prices increase, would impact inflationary numbers to rise. Yes, we need a rise in inflation to instill a healthy economy, but if it rises too fast could have a huge negative effect on the economy and job creation. So, when inflation rises too fast the government steps in and raises interest rates. This slows down the American consumer from buying and or spending. The consumer takes a ‘wait and see approach” and hunker down a bit on any of their future “wants” and focus on their immediate “needs”, thus keeping inflation in check. This will inherently slow down inflation to a manageable level for solid economic growth. This cycle repeats time and time again over time.
With a vaccine now approved, this will be euphoric for the economy. As American and global manufactures return to work, supply chains will be re-supplied, keeping the price of goods lower and allow inflation to stay in check, not needing any artificial interference from the federal government.
The Stock market should surge in the first quarter of 2021. With this promise of the new vaccine, and the new government taking over on January 20th, I believe again this euphoric state will be strong in the first quarter of the year. I believe this bull market will level off in quarter 2 of 2021. As the new government will be faced with a 23 Trillion-dollar budget deficit, the new focus will on the economy and getting the debt under control. Who pays all these debts? The American taxpayer. With the runoff elections in January, the Republicans are hoping to keep the majority in the Senate, to keep the Democrats from going too far to the left. Regardless of how this election turns out, I believe a new tax structure removing any of the recent tax cuts to big corporations will be eliminated. Higher taxes will be coming, regardless if Trump’s were to stay in office or Biden changes current tax laws.
This is where it gets a bit sticky. As this country will sail into uncharted waters, with the pandemic at our tailwind, yet lurking by our side. Trial and error in this country, attempting to keep the entire ship afloat. So, you and I, our families, what do we do? I believe in this situation it would be smart to batten down the hatches and take a conservative approach on both spending and debt for the next 3 years. Reassessing our current employment picture, our current mortgage and home equity position, and our current debt load. Can we utilize and take advantage of the low rate environment Covid had left in its wake? If our jobs become jeopardized in 2021, one may not qualify for many loan programs at these historically low-interest rates. These refinance opportunities could fall out of your “financial arsenal” of tools you may utilize in 2021.
Re-defining and the meeting of the needs of the people, protecting and gaining the confidence of the American public will be the focus for our new government. . This will happen and will take several years as every industry seems so co-dependent on other industries. So trial, error, and time will get these issues resolved. Only to allow a new set of circumstances or the next battle this country will experience.
Prepare for tight times. This is what my wife always tells me. Prepare for tight time, never have a tight time. How do we do that? We do it through your mortgage, time, and appreciation.
So here is my advice on the different type of mortgages and situation you may be in;
- If you have refinanced in the last 6 months and your rate is at or below 3.25% on a 30-year or 2.75% on a 15 year do The costs of a refinance vs the benefit may take too long to break even be financially sound.
- 50% of American mortgages are above 3.25% on their interest rate. I highly suggest these individuals consider a rate term refinance. Lower that rate and save tens of thousand dollars in payments and interest. I have some very cool charts I can run the numbers and look at the savings for you
- Shorten your term from 30 year to 15 year. – in these cases, going from a 30 to a 15 year will increase your payment by 25% or more. If you are financially solid this option can save tens of thousands or hundreds of thousands of dollars over the loan life.
- Refinancing to a 30-year term and paying extra each month to pay off in 15 years. Many times, I have utilized this strategy in 2020. Great strategy as it allows one to have control. If you have the extra cash that month you add extra to the principal to attain that 15year pay off. However, if affected by life, such as a new water heater, the car broke down, etc. you have the control to take care of the NEEDS first. Then next month get back on track to your goal of a 15-year payoff.
- No Appraisal needed? In many cases on a rate term or cash-out refinance we are finding that we do not need an appraisal. This can save $450-$550 cost on your refinance. Also saves any headache organizing a time for the appraiser to come to the home. Also, it puts you in a position to be RISK-FREE. So, it costs you nothing out of pocket to get the loan through the process… We would know if we need an appraisal on your loan once we take an application and run it through the appropriate loan origination system.
- CASH-OUT – debt consolidation – This is the number one strategy I believe will have the best outcome for many homeowners. Please take a look at your debts. Many of these can be paid off by utilizing your all-time high home equity and drastically reduce your overall cash outflow. Many say I don’t want to roll in a car or a credit card into my mortgage. Let me say this. If you were renting and you walked away, your debt will follow you doesn’t it. Let time pay off these debts. As you are a homeowner, TIME has increased your net worth. Let the equity or time pay off these debts. Hit the reset button and take advantage of the current market conditions. If you sold the home, your debts are gone, and you still would have 20% of the equity when you sell. The mortgage guides state that we must leave you a 20% stake in equity when doing a cash-out refinance. There is no rule that says I want to hit the reset button. Remember that quality of life. You deserve it. Enjoy your life along the way. Apply simple financial disciplines and get ahead of the game. My job? Teach you how to play the game.
- Reduce or eliminate PMI (Private Mortgage Insurance – With current values we are refinancing clients to a lower rate, reducing or eliminating PMI. Also please note: Did you know you can buy out of PMI upfront at closing at about a 50% discount? With equity, you can also roll that buying out of PMI into the mortgage. Really cool tools to use when getting out of PMI. Also, this tool can be used when you purchase a home with less than 20% down.
- Credit repair to refinance to a better interest rate. Yes, we have the tools to assist in how we can get your credit scores optimized ensuring a better or the lowest rate possible. This is paramount when refinancing on a conventional loan. So, if you have a couple of dings on that credit, let me assess and advise on how we can optimize your options.
- Buying a new home. With values at an all-time high and rates at an all-time low. If you are considering moving. Call me so I may determine your net proceeds from the sale of your home and your mortgage options with less than 20% down and avoiding that PMI we discussed
- I highly suggest anyone considering any of these strategies to reach out to me or click here and complete a loan application.
Remember I do not bite, nor am I going to sell you anything. Just the same no bull upfront service I have always delivered in discovering opportunities to better your financial picture.
I thank you and welcome your feedback, questions or ideas, and criticisms. I look forward to hearing from you and stay safe out there. I want to thank all of you for being such loyal clients and friends. You know I have a pretty decent life. Great wife, great kids, and not worried about personal finances. Through many years of trials, tribulations, the goods, the bad, and the uglies, my wife still keeps me around. I am grateful for what I have accomplished, and what I have been blessed with. When I look back, some very small sacrifices and simple financial disciplines have kept my compass pointing North. I have an absolute passion for sharing what I have learned over the year. It works. It absolutely works.