Mortgage’s New Normal: Guide to Better Borrowing Amidst Higher Rates

Hubwonk: Mortgage’s New Normal: Guide to Better Borrowing Amidst Higher Rates

[00:00:00] Joe Selvaggi: This is Hubwonk. I’m Joe Selvaggi. Welcome to Hubwonk, a podcast of Pioneer Institute, a think tank in Boston. For many in the U.S., homeownership is an essential element of the American Dream. Over the course of a lifetime, buying a home can represent the first rite of adulthood, or a place to raise children, or new roots after a professional relocation, or a chance to downsize as an empty nester.

[00:00:25] But recently, this perpetual cycle of home-sale demand seems to have substantially dimmed, owed in no small part to the near doubling of mortgage rates from below 3 percent to now near 7 percent in just the past two years. This sudden upward surge in rates has had the remarkable effect of slowing single-family home sales to a 14-year low, slowing more than 33 percent year over year according to the Greater Boston Association of Realtors.

Given that for buyers purchasing power is diminished, and for sellers relinquishing cheaper legacy mortgages, what choices do determined consumers have when deciding to move? How has the mortgage market adapted to higher rates, and what can banks and the bankers who provide the attending services do to facilitate and support their clients’ need to buy or sell a home?

[00:01:14] My guest today is Trip Miller, first vice president of Cambridge Savings Bank. Mr. Miller has nearly 20 years experience within the mortgage industry, offering residential mortgages for clients who range from first-time buyers to experienced investors — and in local economies that have seen real estate booms and dramatic busts such as during the 2008 global financial crisis.

[00:01:37] Mr. Miller will share with us the current trends in mortgage rates and explain that beyond the discouraging headlines lies options and opportunities for determined consumers. He will offer his insight in how individuals armed with information can improve their profile to enjoy the lower rates and explore the range of mortgage options available to suit their particular needs.

[00:02:00] When I return, I’ll be joined by Cambridge Savings Bank’s mortgage expert, Trip Miller. Okay, we’re back. This is Hubwonk. I’m Joe Selvaggi, and I’m now pleased to be joined by First Vice President of Cambridge Savings Bank, Trip Miller. Welcome to Hubwonk, Trip.

[00:02:18] Trip Miller: Thanks, Joe. I appreciate you having me.

[00:02:20] Joe Selvaggi: Well, I’m pleased to have you join me today to help our listeners get a sense of — I think what’s on a lot of people’s mind is we’re talking about home mortgages or, essentially what all of us need in order to buy a home — unless we’re fortunate enough to have the cash — we need to rely on a mortgage. And a lot of homes aren’t being bought and aren’t being sold because, as I hope everyone listening knows, recently, mortgage rates have gone up substantially. So I’m hoping our conversation can somewhat demystify the process so that those people who are perhaps on the edge of being able to afford, or frankly being able to sell, might be able to find new insight that will facilitate the opportunity to own the home of their dreams.

[00:02:58] So, let’s start at the beginning. I wanted to have you as my guest. I’m going to characterize you as an expert in mortgages, but for the benefit of our listeners, how is it that you became so good at knowing everything about mortgages?

[00:03:10] Trip Miller: Thanks, Joe, for that. I, uh, don’t go around calling myself the expert in mortgages, but, to your question, I’ve been in the business about 18 years here in the Boston market. Through the time that I’ve been in the business here since about 2006, I’ve seen several market cycles, including the mortgage crisis, of course, and then the last decade or more where mortgages have been a fairly robust business, even through the COVID years and then up through the last 18 months, which of course is the first time we’ve seen really mortgage rates climb, in quite a while. But, to answer your question directly, I’ve cut my teeth on pretty much every type of mortgage lending and I’ve worked for very large banks, which will remain unnamed, as well as large correspondent lenders as well, which would be like a mortgage lender as opposed to a bank.

[00:03:57] And then, I’m at Cambridge Savings Bank today, where I’ve been for approximately six, six-and-a-half years. We’re a community bank. We’re 190 year old this year, a community bank. We’re one of the oldest incorporated businesses in the city of Cambridge and so through those 18 years and helping really thousands of customers, right, thousands of mortgages. I’ve assimilated my knowledge base.

[00:04:21] Joe Selvaggi: Well, you anticipated my next question, which is tell us about Cambridge Savings Bank. We perhaps all know it as that big, beautiful, iconic building in Harvard Square with a sign with a clock on it, you know, imposing his presence on Harvard Square. You’ve been there for how long now, Trip?

[00:04:37] Trip Miller: I’ve been at the bank personally for about six-and-a-half years. Of course, the bank is a very old bank, as I just mentioned. And to your point, we, we’re right, that is our flagship main branch is in Harvard Square by many people are familiar with the old newsstand that used to be in Harvard Square there. So we’re right there, right by the T stop, the Red Line, and that is our flagship branch. We have approximately 20 branches around the Middlesex and Suffolk County areas. But in Boston, that branch is our flagship main branch.

[00:05:08] Joe Selvaggi: Wonderful. So, you’re the home team. So let’s start at the beginning for our listeners who, let’s say, let’s walk before we run. Let’s talk about it. We want to buy a house, for most of us, the most expensive thing left to buy in our lives, and we pay it back over time. What are the, let’s say the terms of how long we typically borrow money to pay back a home?

[00:05:27] Trip Miller: Okay, as you say, and we’re talking residential mortgages, so I’ll qualify that here. By residential, what I mean, typically that’s defined at least in the U.S. that’s defined as properties that are 1 to 4 units that can include condos. So a condo is a one-unit property. just like a single-family home, and then we go up to four units. Once we exceed four units in our industry, that becomes a commercial property. If you have a property, that’s, let’s say, six apartment buildings, that goes over to the commercial realm and that gets outside of my expertise. I, like I say about that, I can be dangerous, but I don’t know that business like I know residential lending. The property occupancy, we call it, can be generally we’re speaking about primary residences where you go sleep at night and you live the bulk of your life at.

[00:06:11] However, in residential lending, we do lend on second homes. Vacation homes, let’s say, something like that — on the Cape or in Florida or wherever you may be looking. And then we do what’s called investment properties as well. As long as they don’t exceed the four units we just spoke of. So that could be a single-unit home that you rent, or it could be a four-unit multifamily in the markets that have those where you rent.

[00:06:35] Establishing that is the landscape in which we operate. The typical mortgage term in the U.S., anyway, is usually a 30-year fixed rate mortgage as far as what we call the product would be the 30-year fixed, but we do offer in our business typically the varieties of term would be 30, 20 on occasion and then 15.v We often see the 30s and the 15s would be the bulk of the loans that we write. There could be other odd terms available. You can get down to 10s and so forth, but typically those aren’t very typical in our business. It can be done in many cases, but usually when we talk mortgage, you’re talking about what 30-year fixed rates or 30-year term mortgages.

[00:07:19] Joe Selvaggi: Okay, that’s great. That sets the table. And of course, you alluded to this fact that we talk about rates. there’s going to be an interest rate on the money we borrow. That’s kind of the crux of our discussion. I know what fixed look like. You know, you can fill in the blank. 7%, 2%, 3%. Whatever it happens to be, that’s my rate for all 30 years or 15, as you described. But let’s assume it’s a 15, 30-year term. Describe for me what the adjustable, you know, in broad terms, what does it mean to have an adjustable rate mortgage?

[00:07:49] Trip Miller: OK, so adjustable rates, or the acronym for that is an ARM we call it in our business. So if you hear someone say an ARM, that’s an adjustable rate mortgage is what that means. And like you say, the fixed rate’s fairly straightforward. When we’re calculating mortgage rates, it’s only a few numbers we look at. We look at that term we talked about, the 30 years. We look at the rate of interest in which we’re writing that loan for, and we look at the loan amount, of course. So we’re looking at how much over — how much money you’re borrowing over how long at what rate equals the principal and interest payment, or what we call P&I in our business for short. So, the same factors, if you will, are existent in an ARM, except the rate portion of the mortgage typically is adjustable.

[00:08:35] So, how do they work? They come in various varieties. And by that, I mean, there’s a 5-1, what we call a 5-1 or 5-6 in today’s world ARM, we call it. I’ll describe what that means. There’s a 7-1 or 7-6 ARM, and then there’s a generally a 10. So those are the three we normally see. There’s some fringes out there. There’s some 3, 3-1s, there that, that don’t get written much. And there are some creative products that some lenders have out there that you might hear about that are like a 15-15 and things of this nature. But for our purposes here, let’s just say that, a 7-1 ARM, let’s call it, is probably the most common arm or a 10.

[00:09:12] Joe Selvaggi: Okay, that’s good. I, so in broad strokes, we have a 30- year fixed. But by contrast, a 7-1 ARM suggests that for the first seven years it’s fixed, and then it’ll just, by some index, you describe many indexes, it can go up, it can go down. So for a buyer who’s right at the edge of their mortgage payments, that might not be ideal, because if it goes up after seven years, that might put them in a more tighter situation.

[00:09:36] I know you can’t lay down any particular numbers, but just bear with me. In very broad terms, we know we were enjoying 30-year fixed mortgage rates only, let’s say, two or maybe a year and a half ago, below 3%. Where are they floating now? Just give me a couple numbers. A 30-year fixed versus a 7-1 arm.

[00:09:57] Give me a range. For our listeners, this is the 20 of February. We’re in Boston, Massachusetts. This is no guarantee, but just for argument’s sake, where are  we ballpark?

[00:10:07] Trip Miller: Yeah, I mean, the best answer I can give you today, as you state, February 20, is approximately 7 percent on a 30-year fixed rate mortgage. And in many cases, the adjustable rate mortgages right now, we’re not seeing a lot of what we call traction in the business where they’re much more aggressively lower, maybe slightly lower, but there’s some things going on fiscally that with yield curves, we call it and so forth that are causing some of those adjustables to not really be terribly advantageous.

[00:10:38] But we have seen a bump up in the past couple of weeks with some of the inflation numbers that are coming out in the economy have sort of scared rates up a little bit, I would say. The last few months, if you haven’t been paying attention closely, the last few months, we did dip down in the mid-sixes. We were seeing some rates that were maybe six-and-aahalf and we’ve even seen some lower what we call first-time homebuyer or low-to-moderate-income type products and so forth. We have seen some of those also that have been hovering down around 6%. but in the most recent week or two, we have seen rates — we have seen rates move up a bit with the 10-year Treasury. As the yield on it has moved up, we’ve moved up with it. So right now, I think it’s safe to say that an average approximately 7 percent is the number.

[00:11:26] Joe Selvaggi: OK, all right. Now, also we want to get into the nitty gritty. You talk about broad strokes. Let’s talk about the individual borrower. When they walk into your — and you’re a trusted advisor, you’re going to give them the best deal you can, within the parameters. Does the individual buyer, They’re, I’m sure you’re valuing their ability to repay the loan. Does their, let’s say, income, their credit rating, what affects the rate? Is it, if we’re all buying the same house, does individual buyers, credit and income have a huge bearing on the actual rate they pay?

[00:11:58] Trip Miller: I think the short answer is definitely, yes. We look at the borrower, we look at the property. We look at, firstly, the borrower. you mentioned the borrower. Does my credit matter and my debt load, you call it, we call it DTI or debt to income ratio in our business, but we look at, we pull your credit, we look at the credit score. So, one thing we see on the credit report is that score. You may be familiar with what is a term called a FICO score, for example, that’s probably the most common term. That score can impact the rate you get. Those scores range typically in our business somewhere around 600 on a credit score to upwards of 850 if you happen to have perfect credit, which I’ve never seen, but over 800 anyway, those are the ranges that mortgages are approximately are written inside of.

[00:12:44] If you’re below 640, down to 600, it gets very difficult in our business to obtain a mortgage, number one. And then if you’re above that range, but let’s say not perfect credit — and then let’s define perfect by, let’s say, 740 or better score — every 20 points in that range can impact the rate you get.

[00:13:02] The lower your FICO, typically the higher your rate. That’s what’s called, we risk-based price it, and that’s based on willingness and ability to repay. And that’s just how the industry looks at, views it. So the lower the credit score, typically the higher the rate to offset the risk for whether you’re going to get paid back as the lender. The other piece of that is we don’t just look at the credit score when we pull your credit. When we pull credit for a borrower, we’re also looking at what we call the trade lines or the history of the credit. So that would be, what kind of credit do you have? Do you have a lot of installment debt? Installment debt would be like, I borrowed a loan, a car loan. I took out a car loan and I pay back monthly every month $200 a month. That’s an installment type of debt. We also look at revolving debt. That would be, you’d be familiar with that with credit card debt, which typically changes based on what your balances are on your credit card.

[00:13:52] So if your balances are high, your payment’s higher. If your balances are low, the payment’s lower. That’s revolving-type debt. And there are other types of debt, what we call a mix of debt. So credit is also looked at in our businesses. How long have you had the credit? How much debt are you carrying relative to the available credit on your credit? So debt-to-credit ratio, effectively. So, if you have all your credit cards maxed out, for example, that can impact your credit score, but it can also impact our debt-to-income ratio and so forth. So, we’re looking at your credit profile, you would call it, how you pay, what your mix of credit is. That does directly impact the scores we see, but we also look at those things when we look at the credit report.

[00:14:35] We’re not just looking at what is your score and that’s it. Beyond that, we also, because we’re lending on property, the properties I mentioned earlier, one to four unit property. We’re securing our loan with that property via a mortgage. That’s what the mortgage is — you’re giving a security interest in that property to the lender who’s giving you the money in order to give you the loan. If you default on that loan, the lender has the ability to foreclose upon you and come back and take that property. And that is, that’s what the mortgage does. So we look at the property because we’re really lenders, we are not really in the business of owning real estate. They don’t want to own the real estate.

[00:15:12] They don’t really want to go through that process. To be honest with you, there’s a lot of expense that’s involved in that process, but that is their only recourse. And so we look at the property, we look at the condition of the property. Is it turnkey? Is it not? Is it marketable? And that’s done through the appraisal process.

[00:15:28] So, this is where you get into things like how much are you putting down versus what kind of property is, what is the occupancy, what we spoke of earlier, primary, second home, investment, all of those factors weigh in. So, we really have a very complex grid, if you will, that spells out what that rate will be and a combination of the credit that we talked about and the property is real and the product and term, et cetera, all of those factors factor into what that rate will be.

[00:15:56] Joe Selvaggi: So, we don’t have to dwell on it, but I’ll say, I’ll just make the obvious, if my credit score affects my rate, and my debt affects my rate, and the quality of the property I buy affects my rate, to do the opposite, or to improve all those, means I’m going to optimize, you know, regardless of the rate environment, I’m going to get the best possible rate if I improve my credit score, reduce my debt, and choose a, what you describe as a more marketable property for the bank.

[00:16:21] Trip Miller: Definitely. I think in short, yes, I think you can basically state that.

[00:16:25] Joe Selvaggi: Okay. All right. So that’s we’re talking in general terms, but let’s — I think in my own experience having a relationship with a bank and a mortgage officer, it’s really, you know, useful to make me as a buyer more competitive. What can it — now’s a chance to toot the horn of the individual mortgage person. How can they help me be a better buyer? Is it, can you be going with me to the home to make the offer, or what is it that you can do for me to make me the best, most competitive buyer for the home of my dreams?

[00:16:58] Trip Miller: Yeah, that’s a great question. So number one, I’ll qualify myself and just saying, I really consider myself a consultant first and foremost. Typically what we see in our business is a fear of flying. So when people call us, they don’t really know where to start, usually. That’s usually the case. They’ve maybe poked around. They know what maybe they’re, if they’re younger, they potentially know what their parents have told them about mortgages, which usually is find the lowest rate, find the lowest fees. Okay. My response to that is that’s about the tip of the iceberg effect. It’s about 10 percent of the conversation are the rates and the fees.

It’s important. So, I never dismiss the importance of those numbers, and I cover all of that thoroughly with a potential client. However, what I do describe is a scenario where this is one of the most important transactions you’re going to probably do in your life. I put it up there with marriage and having your kids and your job. Buying your home where you live, let’s say primary residence is one of the most important things you’re going to do. And it may be one of the largest purchases that you do in your lifetime. I treat it very seriously. It carries a lot of weight. And what I would say to a potential client is you really are looking not only for the rate and the fee part that we discussed, but you’re really looking for a relationship in this business.

[00:18:15] What you’re really trying to do is can I, if I found somebody that I feel comfortable with, I’m sharing a lot of personal information, including my income and my assets, possibly about divorce and separation and child support. We get into everything in the mortgage business. So, you want somebody you’re very comfortable with.

[00:18:32] Obviously, you want somebody who’s very knowledgeable and you do want — there’s a connection there. I describe it as building a team. So, when you’re going out and you’re looking for who am I going to get my loan with? Part of what you’re thinking of is if you’re using a realtor, and in Massachusetts we use attorneys to close loans, it’s really what I describe as a four-legged stool. And if any one of those legs is not stable or doesn’t perform as well as the other, it can cause instability, let’s say. So you’re really looking to develop a team. So what I would say is you really want a comfort level with someone and you really want start the process and enter into the process.

[00:19:10] It’s really never too early, I typically say, for borrowers, especially ones that don’t know a lot about their credit or haven’t been down this path before. You almost can’t start too early, really, but you do want to find somebody you feel comfortable divulging all that information to and going through the process.

[00:19:26] And you really want to be dedicated to that person once you make that decision. And that person, as I say to many clients, if you find somebody that you really connect with, that you feel more comfortable with than myself, then I would encourage you to work with them, because you’re going to spend a lot of time with them over the process. And really, that’s that 90 percent of the work happens after you’ve done the rate, after you’ve done the fees. It’s the process of going from point A to point C, from beginning to close and getting into the home, and getting you there in the most efficient and painless process that you can.

[00:20:00] Joe Selvaggi: So, let’s let you flex your muscles and talk about, again, in your experience, you’ve been at Cambridge Savings Bank for a while, but you’ve also worked at other, firms that offer a range of loans, just at a very 10,000-feet view level, what are the different kinds of, you mentioned a few times, the first-time buyer, give us a hint of, what is it that a first-time buyer can get that someone else can’t get? We’ve heard of VA loans, Veterans Administration loans. Describe just in brief terms, what is it that if we are either a home buyer or a veteran, what do those loans, what doors do those qualifications open for us that other people may not be able to reach?

[00:20:37] Trip Miller: Okay, that’s a great question. If you qualify for, let’s say, a VA loan, for example, gives a benefit to a veteran who otherwise meets their qualifications for the benefit of them backing the loan, that loan is actually guaranteed. What that means is that loan, the borrower may put down as little as 0 percent down and not have what we call mortgage insurance.

[00:20:57] So in our business, the term PMI, you may have heard of that term, you may not have, that’s private mortgage insurance. If you’re putting less than 20 percent down in our business, typically you have to deal with the concept of PMI. Some loans have it, some loans don’t, but typically there’s a cost involved there if they don’t have it, that’s factoring backwards into your rate or in some other fashion. With a VA loan, the actual loan is guaranteed by the Veterans Administration. So, in effect, a lender does not require the PMI for the risk inherent for the borrower putting little to no money down. They actually guarantee that loan. That’s a feature of that product, or that program, that is available to veterans.

[00:21:40] Joe Selvaggi: For clarification’s sake, okay, if I’m a veteran and I come to you, do I, who goes to the Veterans Administration to ensure it gets back? Do I go to you or do I go to the veterans and they go to you?

[00:21:50] Trip Miller: So the VA does not do loans. The VA has lenders that do loans. So lenders who do participate in originating VA loans are the ones who actually lend the money. They close the loan in their name and then all the notes and the paperwork says the bank or the lender’s name on it. The VA is simply providing the guarantee is what they’re doing. They’re not the investor on the loan. They don’t buy the loan, they don’t own the debt. They simply back it is what they do.

[00:22:18] Joe Selvaggi: I see, I see. Okay, so so these are programs, we don’t have to get into all the nuance. I want to get into some of the trickier things that maybe our listeners have heard of, but don’t really understand or don’t know how it works. One of them that sort of mystifies me is the idea of, we’re all wrestling with higher interest rates, we’re not happy about it, we wish they were below three, but now as you say they’re at seven.

[00:22:37] The idea of trying to reduce your rate by paying points. I’ve heard of this idea where someone out at the beginning of the loan, they’ve got a 7 percent rate. They’re like, that’s too high. I’d like to pay this money upfront so that I’m enjoying a 6 percent mortgage. How does a point work?

[00:22:52] Trip Miller: So, when we’re looking at rates, what we’re looking at really rates in our business, mortgage rates are effectively tied to the bond market. Okay, so each rate, let’s say the rate at 7 percent today is what we call par. Par means there’s no cost to obtain that rate in the form of points, nor is there any credit being given back to the borrower in the form of credit from the lender for taking a let’s say higher rate, which can be done.

[00:23:17] So, when we look at a snapshot of what’s called a rate sheet, rates in the mortgage business, we quote based on eights, which is 0.125%. So when we go down in rate from seven, the next step is 6.825% And so forth. At each of these steps in rate, when we look at a rate sheet, and this changes, and I would also qualify this in saying the dynamic between the rates change as well. So, there’s no one set step down or up on a rate sheet. That’s based upon what the bond market is doing in the secondary markets, we call it. So that’s what’s really moving in our business.What’s moving isn’t so much the rate, it’s the price of the rate, and as that price moves around in the background behind the rate, once it moves enough to cause a lender to then drop or increase the rate, you’re able to come in and maybe say, ‘Could I get — if rates today are 7 percent and it’s not costing me any points — what would it take for me to get a rate of 6.875 or what have you?’ And so I can come back and say that cost of that rate is going to be a half point. A half point is a half of a percent. When we say a point, we mean up one percent. One point equals one percent. That is of the loan amount that you’re taking. If your loan was $500,000, then one percent is $5,000. If I said to you, Sure, Joe, I can get you a rate. of 6.75%, it’s going to cost you a half percent. I would, that would mean to you it’s going to cost you $2,500 in addition to the closing cost of that loan and you can buy down the rate. So, what you would think of in that example is you’re basically prepaying some interest on your loan in order to obtain an early rate that is lower than the market rate on that given day, is really what it is. So, then what we do is we run a break even on that rate. So we look at — if I took the 7 percent rate, my payment would be X. And if I take the 6.75 percent rate, my payment is going to be Y. What’s the difference? And if the difference is between those two rates, the difference is $50 a month, let’s say arbitrarily, then you can run a calculation.

[00:25:28] You can say $2,500 is what it’s costing me. I’m saving $50 a month. If I divide $2,500 by my $50, I get X amount of months, and those months are my break even. Once I meet that break even, my investment of $2,500 is now paying off, and if for some reason I do not make that timeline, I sell my house, I get relocated by my job, we get pregnant and we need a bigger home, so we have to sell — any of those things happen where I refinance that loan into a 15 year loan product or I’m in an ARM and I go to a fixed, then that money is basically lost or some portion of that money that you spent to buy that rate down in the form of points might be forfeited, in that example.

[00:26:11] Joe Selvaggi: So, your mortgage officer would help you to say, okay, you would explain in black and white, say, go, you can, let’s say if your parents want to give you some money to help you with your, or the developer who’s selling you the property, he’s yeah, I’ll help you pay down your loan. You, you do the math. You did it quickly in the back of the napkin. And it’s, let’s say it’s 50 months and that’s a little more than four years. If you live there more than four years, you win. If you live there less than a year, you lose. And it’s just math, but you as the mortgage guy, you’re going to help them with that math, right?

[00:26:38] Trip Miller: That’s right. Usually when we’re going through the process of doing the application for a client, we’re discovering their needs and we’re looking at things. That’s where these things like you ask about VA or you ask about other products and programs. You had mentioned first-time homebuyer programs. I feel compelled to inject there and say, many of our first-time homebuyer type products and programs, you had said earlier, what are the advantages or why would somebody, assuming they qualify, why would they use that? And the answer usually is, of course, at the bottom line related to the payment in some fashion.

[00:27:08] But how you get to what the benefit is, how those programs work. it’s usually a combination of either the rate or the PMI we discussed and or down payment. So many of those programs might allow for a lesser down payment and still have a lower rate and/or mitigate or subsidize the PMI. So, you might have an example with a borrower who doesn’t have a perfect credit score. Why? Because they’re younger, maybe don’t have established credit. They don’t have bad credit, they just don’t have a lot of credit. So, the credit score is not developed yet. So, as opposed to penalizing them to have a higher rate, if they qualify for these first-time buyer programs, and I use that term — I will qualify that and say low-to-moderate income borrowers — so, we’re not out to help most of these programs are not out to help somebody who makes $800,000 a year. They’re out to help people who make up to a certain amount of money. And then that’s who we’re helping, trying to assist, going on the gross assumption that somebody that makes more money can afford it. So we’re trying to help subsidize the cost of housing, which, of course, has gotten very high.

[00:28:14] Joe Selvaggi: Yeah, this seems intuitively obvious to me. The first-time homebuyer, I guess I hadn’t thought of it really, but then they come to you, they may not have a credit history, not because they’re profligate spenders, but because they just are young, it’s not their fault. They need time to get their legs under them. So, when you walk in, you look at a, let’s say a maybe not the perfect credit score, and maybe they have some debt, maybe from student loans and that sort of thing. And they’d like to buy a home, but they, you know, dot their I’s, cross their T’s, they work hard, they earn an income, they save well, but they’re just earlier in their life. So they deserve some extra consideration. In broad strokes, that’s the spirit of a first-time home loan.

Trip Miller: Absolutely.

Joe Selvaggi: Okay. All right. Let’s get more complicated here. One of the things, I’ll admit this concept really intrigued me and it’s — let’s not go too deep — but I love this idea of an assumable mortgage. We’ll get into what it means, but this is the idea that a seller sells his home to a buyer, but also sells his mortgage to the buyer. Why that’s attractive is perhaps that seller has a 3 percent mortgage and the buyer is facing a 7 percent mortgage if he gets a brand-new mortgage. Explain to our listeners,when I first heard of this, I’m like, wow, this is the, the key that will unlock all of our problems. We’ll all just buy the old mortgages and everybody will retain a low mortgage rate. Why is that not  A, available to everyone? And maybe not as good of an idea as it sounds?

[00:29:30] Trip Miller: Well, so it sounds like a great idea on paper, number one. Number two, as I described earlier, I’ve been in the business 18 years. I’ve never actually seen an assumption on a mortgage. It’s a little bit of an antiquated concept in the sense that I believe they were more in vogue. Let’s say I’m going to, I’ll. I won’t date myself, but I’ll just say it pre, um, it’s pre me being in the business. I believe in the ‘80s, ‘90s, there was a period of time where assumptions were more in vogue. And this is going back when rates were, you know, 12 to 17%. We still run into people, of course, who like, oh, my first mortgage was 17%. Our business has evolved over time in ways, of course, like lots of businesses. And with the complexities that are inherent with our world. Most of the loans that are originated to be sold in the secondary markets. Okay, so what that means is even though you’re doing your loan at XYZ Bank, that bank is generally not necessarily owning the debt.

[00:30:30] They may own the servicing, meaning they send you the bill, but that does not mean necessarily that they own that debt. If you can conceptualize that, we talk about investors in this business. So, as I said earlier, mortgages are basically bonds. They’re able to be sold to investors. So, investors purchase those bonds at a particular rate, which, of course, returns them a particular interest income from that. It’s a little more risky than, let’s say, investing in 10 year Treasury bills, which are guaranteed from the United States government. So, they get a little higher rate of return, et cetera, et cetera. So, if you can understand that concept, and also understand that the bulk of the loans originated — and when I say bulk, I don’t have an exact percentage, so don’t quote me, but I’m going to say it’s 80-plus percent in the residential world — the loans are being sold. So, most investors on the back end don’t want to be in a position where they’re going to allow a loan to be assumed by somebody else who was not part of the original underwriting process for that loan.

[00:31:31] So, that loan was underwritten at a particular point in time with a particular set of guidelines at that time and so forth. So, they don’t want the game changed on them, effectively, and allowing an assumption to somebody else is effectively a game changer. So the first premise is: In the conforming space, basically loans are conventional, I should say, Fannie Mae, Freddie Mac come to mind. So if I use that term, I use that term synonymous with conforming or conventional loans or Fannie Mae, Freddie Mac. Those loans just aren’t assumable, because there’s clauses in the mortgage that are what’s called a due-on-sale clause, which says that if I sell the property on the deed, which of course somebody who’s assuming the mortgage wants to assume the house, too, that due-on-sale clause will trigger the payoff of that loan.

[00:32:20] So basically that  due-on-sale clause erodes the ability to do an assumption and you wouldn’t do it. So that leaves us with government loans. Government loans are approximately 25 percent of the business out in the market in the U.S. as a collective. Government loans, FHA, VA, USDA loans. All of those loans typically retain an assumption clause in the mortgage. It exists out there. And so again, just to highlight what you asked about: I write a loan at 4%, I go to sell my house. I say, I’ve got an FHA loan, the loan’s 4%, the market rate today for an FHA loan is 6%. Mr. buyer, if you buy my house, my loan’s assumable, which means I can basically pass on my loan to you at this lower rate. Looks very attractive. However, that buyer has to qualify with the lender. Ultimately, it’s up to the lender. A, it needs to be written into the mortgage itself that they can assume it, and then B, they actually have to go qualify. That buyer has to qualify for the loan according to the lender. So, they have to meet the guidelines for that, if they can, and if there’s any equity in that house — let’s say the house is for sale for $500,000, that borrower has a loan for $250,000 that you’re assuming, you would have to come up with $250,000 to make up that difference between what the buyer is selling, the seller is selling that house to you for, versus what the loan is you’re assuming.

[00:33:43] Effectively, you’re not rewriting the loan to write the loan at $450,000 over, borrowing  $450 against $500, you’re basically saying, I’m taking it for the balance that it is. So those are all things that cause problems for assumptions. And the lender, ultimately, I would say the lender slash servicer, we call it, has the final say in that matter. And many lenders just are not willing to allow an assumption either. So it is one of these things that sounds great, but actually doesn’t happen much in today’s world in our business.

[00:34:15] Joe Selvaggi: OK, so I won’t beat it to death. So let’s shift gears. We’re running out of time. Let’s say I have a home. I just bought it and it’s 7 percent and I’m making my payments, but I wish they were shorter or lower. I’ll throw out three concepts where I might be able to reduce my rate, and you tell me what makes sense. I’ve always heard the first idea is to make an extra payment every year. I want to know how that might affect my life, OK. We’ve  heard that as a good strategy. We’ve heard about refinancing. Of course, if rates go down, we can perhaps go from a 7 percent to 6 percent or 5 percent, if that makes sense. And finally, I’ve heard of a concept called recasting, where I actually give the bank some money and they recast the same loan for the remaining term and it’s indeed lower payments. Describe — again, you’ve been around the block, you’ve seen these different techniques. What seems to make sense in which scenarios?

[00:35:05] Trip Miller: Okay, so let’s go off, let’s say we’re talking about 30-year term mortgage, and this is, this math’s always been rattling around in my head, so this could change based on the rate a little bit and so forth, but basically what you described as earlier of making an extra payment, I think you said this, one method that people talk about is making one extra mortgage payment per year, or per 12-month cycle.

[00:35:28] Some people, so there are some lenders out there that do what’s called true biweeklies, you hear about where you make, effectively, you’re making 26 payments over the course of the year, which, if you do the math, that equals 13 payments, not 12, which is almost the same as saying, if I just make an extra payment a year. And you can make that extra payment per year, you can divide it by 12 and make a little bit extra on each mortgage payment each month.

[00:35:54] Any of those methods, effectively, what that’s doing is it’s lowering the balance that the lender is calculating their interest on, and they cannot charge you interest on money that you don’t owe them. So, what that effectively does is when you write that loan on that term over 30 years, which is 360 months, at the beginning of that note, we call it, if you advance those payments that way, or pay them early, you’re shortening the term of the loan, which is effectively lowering your effective interest rate. So, you’re not actually lowering the rate, but you are lowering the cost of money to you over that amount of time that’s remaining, which is an effective rate reduction, if you can follow that logic. So that’s one way of doing it.

[00:36:41] Joe Selvaggi: OK, just me ask, just to put a point on that. My 30-year term becomes, let’s say, because I’ll be paying it off faster, becomes 20 years, effectively.

[00:36:47] Trip Miller: 20, about six, six and a half, I think the math has always been about if you do that for the life of that loan, one extra payment per year, it’s about six and a half years off the life of the loan, remaining, leaving you with about 24 and a half years. So you’re effectively turning your 30 year mortgage into a 25 or 24 year mortgage.

[00:37:05] Joe Selvaggi: OK, all right. Sorry, I don’t know. Keep going.

[00:37:07] Trip Miller: You mentioned recast. There’s no particular order. recast. A recast is, that’s where you, let’s say you come into an inheritance or you’re somebody who makes a, has a job and you have bonus income. And each year you get an annual bonus at the end of the year. And let’s say you’re fortunate enough to have a $100,000 dollar bonus coming at the end of the year. And you say. I’m not going to take that bonus and invest it. I would like to buy down my mortgage, and why do I want to do that? Because I want to recast my payment, because my payment right now is being calculated at $3,000 a month, and I would really like to get that payment down to $2,500 a month. A recast is a method that we use in this business where we don’t change the term of the loan, we don’t change the rate on the loan, but we allow the payment that’s on the note to be dropped to that number because you’ve made a lump sum principal buydown, is what you’ve done. So it’s recalculating that, we talked earlier about P&I, the principal and interest payment. It’s recalculating that P& I payment over the remaining balance of the loan. Why? Because now all of a sudden you have a much lower principal balance or a lower principal balance that is allowing us to do that. So, you don’t change the term at all. You’re not shortening it at all. You would effectively be saving some interest, of course, because, again, the same reasons I mentioned with the 13 payments a year. But at the end of the day, you’re not changing the term again, nor are you changing the rate. You are recasting the payment, the principal and interest piece. And you had a third one. What was it? Can you? You asked about recast. You asked about a 13th payment. Yeah. Oh, you said refinance. Of course.

[00:38:49] Joe Selvaggi: Oh yeah, of course, I think our listeners might know what that would mean. Yeah. But it does cost money to refinance, right? You’re essentially buying a brand new loan. So you have to again, do the math and say, is it worth it over how much time? Is that right?

[00:39:02] Trip Miller: Typically there’s a break even on that, but if people were paying attention earlier, I mentioned a scenario where you could maybe take a rate that’s a little higher than market and get a credit. So once you move over to the refinance world, especially, we do often see if we’ve got a declining rate market.where we think that, okay, rates are at their higher spots now, we think that over the next 12 to 18 months rates are going to drop, so we may be chasing rates back down. Of course, we don’t know, but let’s say they are going that direction. I can look at a loan scenario for a borrower and say, okay, Mr. & Mrs. Borrower, you’re in this loan when you did your purchase transaction, you closed that loan at 7.5%. Rates have dropped to 6 percent today. We think that in the next 12 or 18 months that rates might drop further. Let’s say they may drop to 4.5%, at which point we can run numbers on all of that and say, all right, I’m saving this much because I’m going from 7.5 percent to 6. That saves me x per month. It makes sense for me to do a refinance. To your point, refinances cost money. There are closing costs involved. However, those closing costs on a refinance transaction like this, I could take that rate that’s 6 percent and say to you, Joe, you know, you’re at 7.5 right now, if you go down 1 percent to 6.5%, that’s going to save you $500 a month, which is a substantial savings at 6.5 percent versus the 6 percent you could lock at today. I can pay your closing costs for you. That is what we call premium pricing. Sometimes it’s called a no-no in our business, which means no points, no closing costs. Why would I do it? Take a higher rate, because I’m still saving a lot of money, I think that rates are going to continue to drop, and if I’m going to go refinance again in the next 12, 18, 24 months, I’m going to incur those costs again, which would effectively double my cost to pay refinance, and I don’t want to do that. I want to be zero out of pocket to do this other than my time and energy, and so I’m going to do it that way. And so, we do have the ability to do that also. So, it’s fair to say that there’s nothing for free, because you could have had a rate that’s a little lower, but, at the end of the day, if those costs are being paid for you, they are truly being paid for you. It’s just that you’re taking a higher rate in order to get them paid for you, and that’s just how it works in our business.

[00:41:15] Joe Selvaggi: Wonderful. Well, that’s a good place to sort of wrap things up because I’m sure our listeners, their heads are spinning. There’s a lot to know. We’ve run out of time. If they still, if you don’t mind me asking, you know, uh, for our listeners who want to ask more questions, and are intrigued by your expertise, where can someone find you or your department, if they want to ask follow-up questions to all the issues we’ve addressed here on the podcast.

[00:41:38] Trip Miller: Absolutely. So I manage a team of 17 loan officers here at the bank. We’re at cambridge savings.com and, again, my name’s Trip Miller, and, my email is tmiller@cambridgesavings.com. And my cell number is 720 319-2464. And I can be texted that number, called or emailed, and or I can also assist with anyone on my team who you may want to work with.

[00:42:03] Joe Selvaggi: Wonderful. Because I think a lot of our listeners, they’re sitting there watching the, on Zillow or something, look at home prices going up and maybe going online and finding rates. And they just, it looks like an impossible problem. I think, I hope that listeners have heard this and said, Oh, look, it’s, there’s a lot to this. With some research and with the assistance of a good mortgage officer, I might be able to crack this code. Also, my favorite bit of advice you offered was it’s never too early to start the process, meaning you may be years away from buying a home, but you need to get your ducks in a row to get it once you identify that home.

[00:42:39] Trip Miller: I can’t stress it enough, I have people come to me all the time and they’re reluctant to want to provide the information for one reason or the other. They say, I’m not really ready yet. And I often — we qualify that and look at it, but typically I end up in a spot saying, if you’re serious about buying the house that takes precedent over all these other things. And so really, you should at least pull credit, take a look and start to formulate an idea or a plan. And, to your point, my first mortgage was. At 8.38 percent and I didn’t think twice about the rate. I don’t believe when I did it, I thought about the payment. And so there are a lot of programs out there that allow little to no money down. We’ve got a lot of grant programs in Boston, which are like, where the principality is giving money to help for down payment and so forth. I’ve got all sorts of information on those things. And so, typically people find once they gain a comfort level and they dig deep and dig in, they typically find that actually they can do something and they just didn’t know that they could. And I think that is kind of the crux of what you’re getting at, which is that, there — I wouldn’t look at the rate and just immediately be nervous about starting — I would look at, I would investigate if I’m serious. I typically say, are you motivated? And if the answer is yes, then it’s no skin off your back, and it doesn’t cost anything to call us and speak with us.

[00:44:01] Joe Selvaggi: Indeed, these are not insurmountable problems and, you will, our listeners will find their way eventually, or the sons and daughters of our listeners will find their way. So, I really appreciate your time today, Trip, you’ve been a great asset, and,thank you for joining the podcast today.

[00:44:14] Trip Miller: Thank you for having me, Joe. I really appreciate it.

[00:44:18] Joe Selvaggi: This has been another episode of Hubwonk. If you enjoyed today’s show, there are several ways to support Hubwonk and Pioneer Institute. It would be easier for you and better for us if you subscribe to Hubwonk on your iTunes Podcatcher. It would make it easier for others to find Hubwonk if you offer a five-star rating or a favorable review. We’re always grateful if you share Hubwonk with friends. If you have ideas or comments or suggestions for me about future episode topics, you’re certainly welcome to email me at hubwonk at pioneerinstitute. org. Please join me next week for a new episode of Hubwonk.