August Mortgage Rate Update & Should You Buy/Refi Now?

Dave:
In the last few weeks, we’ve seen a mortgage rates move in a promising direction, but do we expect that trend to continue through the rest of the year, or might we see ’em bounce back up a little bit? And how should investors be thinking about the current rate environment?
Everyone, it’s Dave. Welcome to On The Market. Today we are bringing on lender expert friend of the show, Caeli Ridge, who specializes in helping investors find loans for their investment properties. And today we’re gonna chat about what’s going on with interest rates. Today we’re gonna try and decode what the Fed is doing. And then at the end, I’m gonna break down my conversation with Caeli and just give you some personal insights or personal opinions about how I am handling this market with my own investing. So make sure to stick around for that. Let’s bring on Caeli Caeli Ridge. Welcome back to On the Market.

Caeli:
Mr. Dave, thank you for having me. Thank you.

Dave:
You are such a reliable, great guest. We are so grateful to have you here today to fill us in on what is going on with mortgage rates. So let’s start with the basics. I would love for you to just fill in the audience on where the federal funds rate sits today. And just as a reminder to our audience, federal funds rate, it’s not mortgage rates, it is the one more, uh, interest rate, excuse me, that our central bankers the Fed can control. And although it is correlated closely with mortgage rates, they’re not the same thing. We’ll get into that in a minute, but Jill, where is the federal funds rate?

Caeli:
So the easy answer is 5.25.

Dave:
Okay. I like easy answers. Let’s not get too complicated. <laugh>. Yeah. And how does that compare to the average rate on a 30 year fixed rate mortgage?

Caeli:
So I wanna set the stage, and you and I have talked about this a couple of times, Dave. Um, just to quickly identify for, uh, those listening, there’s something called an LLPA Loan Level Price Adjustment. This is a positive or a negative number that associates with the characteristics of the loan. These are gonna be things like occupancy, loan size, loan to value, property type credit score, right? Mm-Hmm. <affirmative>. So all of those things are going to contribute. So just to kind of, um, uh, uh, quantify for listeners, this would be based on, and I pulled this up this morning, a purchase, a single family residence, an investment property, $200,000 purchase price, 25% down, uh, seven 60 or better credit, let’s just start there. Yep. On an investment property with those characteristics, we would be posting at 6.99 to date with two points. So Okay. Pretty good from where we’ve been for the last couple of years.

Dave:
Uh, sorry. And so what was the difference? 6.99% was for an investor, for an owner occupant, what was it?

Caeli:
Uh, if we go owner occupied, generally speaking, I’d have to pull those, but usually it’s about a point ish. Okay. Um, three quarters to a point. Better for the owner occupied versus a non-owner occupied, that’s usually the LLPA adjustment.

Dave:
Okay, great. And yeah, I think it’s important. Let’s, let’s jump into that just for everyone to know that when you hear these, like high level rates when you go on Wall Street Journal or Yahoo or wherever you look this stuff up, they give you one number. Obviously that is not the number everyone gets. So can you just explain Caeli quickly what the concept of a loan level adjustment is?

Caeli:
So positive, negative number. Okay. A plus or a minuses, um, that when you look at the transaction, like the variables I just mentioned, the occupancy, right? Is an owner occupied a second home, an investment property, your credit score, the loan size, is it a single family residence? Is it a two to four unit property, um, loan to value? Is it 75, 80, 90 5%? Um, all of those differing variables are going to have their own unique LLPA attached to them. And when you add those pluses and minuses up there, and you’ve got that raw LLPA and that dictates where the rate will fall. It’s a little bit more convoluted than that, Dave, but I I think that’s probably a good, um, rounded explanation.

Dave:
That is, that’s a super concise explanation. Thank you. I just wanna remind everyone that we talk in averages on the show, and the only way to actually know what your rate will be is to talk to a lender. Um, but I think the, the useful thing about talking an averages is we can say things like, rates have gone down from April to today, we’re recording this on August 20th, right? We could say that rates were at 8% for investors, now they’re at 7%. For investors, that might not necessarily be what you were quoted, but it’s probably directionally the same. Like your rate would probably went down about a similar amount of one point. So just wanted to call that out. Yeah. So that, what I just sort of gave as an example is true though, right? Like rates have come down from, I think they peaked somewhere around April for the year, um, and then started coming down. I might be wrong about that, but they were, they were higher. So can you just tell us, Caeli, since the Fed as of August 20th when we’re recording, hasn’t changed the federal funds rates, so why have mortgage rates come down?

Caeli:
So, um, a lot of this hinges on secondary markets. Okay. Wall Street and how they’re going to interpret certain, um, language that comes from the Fed. So, uh, the feds meet regularly throughout the year and end of July, Jerome Powell and his friends, um, uh, gave their address. And in that the language of that conversation was very bullish for secondary markets. It seemed to be that the data that they were collecting, which comes as a lag by the way. So the feds are making decisions, um, using their favorite metric, the, the, uh, PCE, different things like that to dictate when and how that fed fund rate may be coming down. So when they talked at the end of July, their sentiment was enough for secondary markets to say, oh, okay, it’s a foregone conclusion. We really believe that come September the way people have been, uh, projecting or predicting that that will be reduced. So that’s already been baked in. When we look at interest rates right now, or when in, let’s say September, if and when they reduce that Fed fund rate, the reduction in interest rates will already have been realized. So I would not expect that there’ll be any huge difference comes September if that fed fund rate is actually reduced.

Dave:
Got it. That is exceptional way of explaining this. Thank you so much. And from my understanding, right, and you know this better than me, the markets are interpreting these things and like how does the, you know, something as subjective and honestly feels like, you know, looking into a crystal ball as trying to interpret Jerome Powell’s tone, how does that translate into like 50 basis point decline in mortgage rates? Like is someone deciding that <laugh>, what he said means rates are gonna go down 0.5%? Or like how does the market reset practically to these press conferences and breadcrumbs of information they leave out there for us,

Caeli:
Right? Like what buzzword and, and from that word, are they gonna take it and, and say, okay, well we’re gonna start trading mortgage back securities at, at this rate versus that? Um, that’s a really good question, Dave. And I would say a lot of it’s on feel man. Yeah. Um, based on data points, um, obviously what Jerome is saying, what’s coming out of his mouth, but also what data they’re collecting, which is the same stuff that the Fed is looking at, uh, and then they’re making those educated decisions. Um, that’s, that’s probably even over my pay grade to, to what exactly what that interpretation is and how much it’s going to reduce the appetite for the long-term bonds. Um, and then it also has to do with how the stock market is gonna be affected, right? So all of those, those variables are, are in play when Wall Street and the likes of investors that want mortgage backed securities are deciding, you know, where those, those long-term rates are gonna be. I, I, hopefully I answered that question. I, I, I guess ultimately, I don’t know exactly,

Dave:
But No, that’s super helpful. It no one really knows, right? Yeah. It’s, it’s like, yeah, bond investors are react, a lot of it has to do with bond rates, just so everyone knows. But like, you say that and you’re like, oh, it’s just bond yields, but what do, why do bond yields do what they do? It’s, you know, subject to the opinions and fears opportunities that bond traders are looking at. So it, it is really hard to distill, but I think the point I wanted everyone to make sure they understand is that rates have, rates often move down ahead of the actual Fed cut. And that’s sort of what’s going on here. And a lot of times what happens is rates reflect what investors in mortgage backed securities and stuff think the Fed will do for the net for the foreseeable future. And so if they’re projecting, you know, one to two cuts for the rest of 20, 24 mortgage rates probably already reflect that. Is that how you see it?

Caeli:
Yeah. They’re gonna definitely show that improvement in advance of necessary decision, uh, that the Fed actually makes with that fed fund rate. Yeah. That’s already been established.

Dave:
All right. So we’re gonna hear a quick word from our show sponsor, but stick around Caeli and I get into one other way. We could see rates drop this year and Caeli’s advice for investors right after this, Hey everyone, welcome back to on the market. So that leaves us in this place where it’s sort of, if rates are gonna go down more, we need the Fed to become even more aggressive in rate cuts, not just do what they say they’re gonna do so far.

Caeli:
Well and truly, you know, Dave, the data has to support, um, uh, bad things. You know, listen, a lot of times people wanna have, have their cake and eat it too. They want it both ways, unfortunately. Uh, and I guess for us, fortunately in this space, the worse the economy is doing, the better for interest rates, right? The jobs report continue to come out hot. All these different, um, metrics that they’re looking at and using, uh, they, they’re just too strong for them to justify those rate cuts and see that inflationary mark at 2%, which is a whole nother conversation. Again, I think something else you and I have talked about before, I’m not sure I even really understand where that 2% came from or why that has to be the benchmark before they’ll reduce rates. I’ve heard a few different things. I’ve googled it and tried to figure it out. I think somewhere New Zealand back in the eighties or something. Yeah,

Dave:
New Zealand. Yeah. They just invented it,

Caeli:
It seemed like it was such an arbitrary thing. Anyway, um, it’s, yeah, I won’t get on that soapbox, but yeah, there, there’s, that’s my answer.

Dave:
There is one other element I wanted to talk to you about, um, and just call out, but would love your opinion about it, is there is another way that mortgage rates could go down or up. This gets nerdy, but there is this historical relationship between bond yields and mortgage rates. And we’ve been talking a lot about the federal funds rate, which impacts bond yields, but basically the closest thing that you can get to a perfect correlation between mortgage rates is the yield on a 10 year US Treasury. If you’re unfamiliar with that, this is basically the government borrowing money from investors from around the world, and the rate at which they borrow that money is very closely tied to mortgage rates. Won’t get into why that’s just, it is a fact. The relationship typically is that bond yields are about two, let’s just call it 2%, uh, lower than mortgage rates.
So if the average bond yield is 4%, mortgage rates are usually 6%, right? That’s what is in historical times, but now it’s higher than that. It’s actually at about 2.5%, right? And so, or even closer to 3%. And there’s a lot of reasons for that. A lot of it has to do with inflation fear, recession risk turmoil in the banking sector, which I’m curious your opinion about. Uh, but that is, at least when I look at ways that mortgage rates may come down. Like I’m curious if you think that spread between bond and mortgage rates may be reduced in the future, which is a potential avenue for rate relief?

Caeli:
Um, you know, I’m not sure I’m gonna be the person to answer that. What I would say is that the macro and microeconomics are, are beyond me. Um, more often than not. And I agree with you that the 10 year is what people kind of latch onto when they’re trying to, um, play the market, float the market and try to identify. But in my experience, I have been wrong more times than I care to admit and how rates are gonna move when I’ve only been looking at that tenure. There’s so many other variables that I’m not deep enough in that space to, um, account for. I, I think that when things get hot over here, investors are gonna run to the safety of the US bond. Um, you know, and, and pull from here and put over there. I don’t know, Dave, if I’m, if I’m gonna be able to answer accurately

Dave:
No worries.

Caeli:
Yeah. Or with any, any kind of insight. Yeah. I, I don’t, I don’t know that that’s something that I’m qualified to justify

Dave:
Totally. That I that’s a totally fair answer. I just want, more than anything, I want people to know that the Fed funds rate is not the only thing that could move interest rates. So like of course, I, I totally agree with you that like, we don’t know exactly why that spread is higher. Well, we do, I can summarize it by saying this, that spread between bond yields and mortgage rates go higher when investors perceive mortgages as a higher risk investment, right? So that, that they call this a risk premium, right? So basically the bond bonds in the US are the low, they call it a risk-free asset, no asset. It’s truly risk-free. It’s known in the industry as a risk-free asset because the US has always paid its debts. So the amount that essentially an investor is deciding, do I invest in mortgage backed securities or bonds? You know, when mortgage backed securities are relatively low risk, the spread is lower when they’re higher, relatively risk, it’s, um, it’s higher. So clearly investors feel that mortgages are more risky now than they were in previous years. So that, that sentiment has to change. What might change that sentiment, I don’t know. But, but I just want everyone to understand that.

Caeli:
Well, and just to real quickly add to the, to that, uh, it’s kind of off the beaten path, but I think that might be useful again to the listeners. One of the things that, that, um, in relation to that, that we’re seeing with the reduction of interest rates over the last couple of weeks since the end of July, and with, with that conversation that the fed’s had, um, while rates have improved, the other thing that I’m noticing is that the points to, to engage to get into, um, real quickly. So up until recently the points, especially on investment property and second homes, we’ve seen it in both, uh, occupancy cases have been high on the higher end of what we’ve been used to. And we haven’t been able to provide options to say, okay, Mr. Jones, you can take this rate with these points, or if you want to increase your rate, you can pay less points.
Right? We really haven’t had that yield spread premium option to provide them because in that higher rate environment, the secondary market knows that rates are gonna come down at some point, right? Mm-Hmm. <affirmative>, they’re going to be coming down as as sure as they go up, they’re gonna be coming down. And when they do come down, especially if we’re on the precipice of seeing that soon, two months, three months, six months, 12 months, whatever it is, what happens to the mortgages that were secured a year ago? Yes, those are gonna start paying off. Yeah, they’re gonna refinance. And the runoff of that is why those extra points were being charged prior to now. And as rates start coming down, they’re on, you know, they’re on the downtick. Those that point option I think is, is something that we’re gonna continue to see some improvement on where the investor gets to choose lower rate, paying the points, higher rate, paying less points, mm-hmm, <affirmative>, those spreads, uh, are also affected kind of similar to the tone that you, you took, um, with risks and secondary market and the feeling of where they want to be putting their money.
Well,

Dave:
That’s a great point. It kind of brings me to my last two questions here. One is, uh, you know, do you have advice for people on that, that sort of calculus at least, right? As of right now today, like what’s the best avenue for investors who are deciding if they should pay points or not?

Caeli:
Yeah, I would say do the math. I’m always touting do the math, do the math, do the math. Um, depending on certain variables and the, and the um, uh, the property itself and how it’s performing. But in general, if I’m answering that, I would say, no, you wanna pay on the lower end of the point side then, then typically, because it’s pretty clear to me that investors especially, well, I think it applies to everybody, but investors for their cash flow, uh, points are tax deductible. I know, but I think they’re gonna be refinancing in six to 12 or 18 months. Yeah. So doing that break even math real quickly, take the cost of the points and the monthly payment difference between the lower rate and the higher rate, and then divide the cost by the monthly payment. And that gives you the number of months it takes to recapture. So if that number is 12 months and you think you’re gonna refinance in 12, 13 months, you don’t wanna be paying those points.

Dave:
That’s great advice. And to everyone listening, if you don’t wanna do the math yourself, I did the math once and I made a whole calculator out of it and I put it on BiggerPockets for free, so you can go look it up, it’s biggerpockets.com/resources. You can go to the financing and tax section there and check that out. Uh, last question, Chaley is, uh, talking about refinancing with these rates moving down, have you seen an uptick in refinance activity?

Caeli:
Oh, I would say, uh, we are pretty investor centered. We do everything of course, but, um, we, we focus a lot of attention on investors, uh, I would say from the end of July to now, which is what, three weeks, 20, 25% increase in application for refinance and not far behind that in purchasing.

Dave:
Awesome. Okay. Well that’s interesting to see. Demand is up for mortgages and purchase rate demand going up is gonna be a very interesting thing to watch here, which we will do. Well, Caeli, thank you so much for, uh, joining us and filling us in today. We will put all of your contact information in the show notes below if you want to connect with Caeli. Appreciate you being here. Thank you, Dave. Likewise. All right, time for one more last short break, but stay with us. I’m gonna break down how these new mortgage rates fit into the bigger economic picture and what all this means for investors on the other side.
Welcome back to our mortgage update. Let’s jump back in. Alright, big thanks to Caeli for weighing in on what’s going on right now in the mortgage market. It is always helpful to have someone who’s actually in there in the lending industry helping us figure out what to do. But before we get outta here, I did wanna just sort of reflect and share some thoughts and opinions on what this all means for investors. Because I talk to a lot of investors and in my own investing, I’m often wondering like, is now a good time to refinance? Should I wait longer? And I obviously don’t know for sure, but I could just share a little bit of insight into how I’m personally thinking about it. So basically what I see is that the Fed is starting to accept that the economy is slowing down. And let’s be clear that this is what they wanted.
And James actually talked about this on a show recently that like, it’s funny that everyone’s like, oh my God, there’s a recession. The labor market is cooling. When for the last two and a half years, the Fed has been very explicit, is that they are trying to cool down the labor market. And so they were finally starting to get that. At the same time, inflation is starting to come down. And just to be clear, that doesn’t mean it’s an acceptable rate, it’s too high, it’s at 2.9%. They want to get it at 2% declining inflation doesn’t mean prices are going down, it just means that the prices are going up less quickly. So we still have a lot of challenges in the economy, but when you put yourself in the shoes of the Federal Reserve, they have this dual mandate. They on one hand are task with controlling inflation.
On the other hand, they have to maximize employment. And so it feels recently, like we’re at this sort of inflection point where inflation has come down enough. So, and the labor market has started to show signs of weakening where the Fed is changing their calculus over the last few years. They’ve just been stomping on the fight inflation button, right? Like they have two buttons, it’s like lower interest rates to improve the economy or raise interest rates to fight inflation. And they’ve just been pressing the fight inflation button over and over and over again. Now they’re thinking, okay, maybe we’re not gonna like smash the, uh, the help the economy button, but we’re gonna press it once. We’re gonna press it twice and sort of try and level things out. That is why mortgage rates have come down, in my opinion. I think mortgage rates are likely to come down a bit more, but not that quickly and not that dramatically.
This is just my best guess. And I’ve been wrong on mortgage rates many, many times. But if we say the average rate on a 30 year fix right now is 6.5%, I think there’s a reasonable chance that they go into the low sixes next year. I don’t know if they’ll go much lower than that without like a pretty big recession. And although there have been recession warnings, if the Fed starts signaling that they’re gonna, you know, lower rates that could mitigate a recession, and I have said this for a while, but I still think like rates are gonna start hovering, you know, in the next few years, they’re probably gonna remain around their long-term average, which are like low sixes, high fives. So if you’re going to refinance, you could wait and see, but your rate is not probably going to be that different than it would be in a year.
But if you aren’t under any pressure to refinance right now, I don’t think it’s the worst idea in the world to wait and see what happens for the next couple of months. It’s probably, I don’t, right now, I don’t see a big risk that rates are gonna go up to like 7%. Again, I could be wrong guys, so don’t just, this is just the way I am thinking about it personally. Uh, I think there is a, let’s just put it this way. I think there’s a greater chance that rates go down from here than go up significantly. They might go up temporarily, but you know, for an extended period of time. So that’s sort of how I am thinking about it. If you are eager to refinance, now is probably a good time to do it because if rates might not move that much, and if that’s gonna save you a couple hundred bucks a month, that’s a really good deal and you might wanna start doing that.
So I know that’s a lot of, I don’t know, but I’m just trying to share with you what I’ve been thinking about. The last thing I’ll mention is I thought that Caeli’s advice about points in a mortgage are super helpful. And if you didn’t follow that part of the conversation, when you, when you talk about points with a mortgage, it’s basically when you go out and get a loan, you have the option to pay some money upfront to lower your interest rates. So let’s just use easy numbers that say you could pay $2,000 to lower your mortgage rate by half a percent. And people are always wondering, should you do that? And often the equation is just like, how long are you gonna have that mortgage, right? Are you going to own this property for a long time or are you gonna refinance and replace the mortgage with another one?
So if you’re not gonna hold onto this mortgage for a long time, it is usually better to not pay the points. That means your payment is a little higher ’cause you have higher interest rates, but you don’t come out of pocket for more money. Instead, I think what Caeli was recommending, and I think his sound advice is don’t pay the points right now, save that money and then use that to cover your refinance closing costs in, you know, in six months or a year. I do think that’s good advice given where we are with mortgage rates that, uh, paying the points might not make that much sense right now. All right, so that’s what I’m thinking. Again, I obviously don’t know, but I do think it’s helpful to just try and understand the variables or the different ways that people like myself who do, you know, I’m not a lender, but I do follow this stuff pretty closely.
And also getting Caeli weigh in, who is a professional lender on sort of the variables that they’re watching. Hopefully this helps you understand what’s going on in this confusing mortgage market and make helps you make informed investing decisions. All right, that’s all we got for you today. Thank you guys so much for watching. If you enjoy the show, don’t forget to leave us a positive review on Apple or Spotify for BiggerPockets. I’m Dave Meyer. Thanks again on the market, was created by me, Dave Meyer and Kaylin Bennett. The show is produced by Kaylin Bennett, with editing by Exodus Media. Copywriting is by Calico content, and we wanna extend a big thank you to everyone at BiggerPockets for making this show possible.