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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[music]

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