Mortgage rates are at all-time lows. Many homeowner’s are taking advantage and locking in for the long term. But what about investors, are they doing the same?
Refinancing rental properties can unlock a good deal of wealth-building opportunities for investors, including the ability to lower interest rates and monthly payments, improve loan terms, and earn additional cash flow.
Interestingly, many investors have not taken advantage of today’s market.
For one reason or another, there are a number of investors that don’t even realize the opportunity that’s in front of them.
Should I Refinance My Rental Property?
In most cases, investors should consider a refinance to:
Earlier this month, the National Bureau of Economic Research (NBER) announced that the U.S. economy is officially in a recession.
Many experts had been predicting recession even before the Covid-19 virus, so it didn’t come as a surprise. The new economic pressures added by the pandemic just intensified the problem and brought it to light more quickly.
The definition of a recession has been typically recognized as two consecutive quarters of economic decline, as reflected by Gross Domestic Product (GDP) in conjunction with monthly indicators such as a rise in unemployment.
Many are concerned that the recession will dramatically and negatively impact the housing market…but historically that isn’t the case.
Real Estate During Recession
Believe it or not, outside of the “great recession” of 2007 (which was caused, in part, to a housing crisis), home values and real estate generally appreciate historically during times of recession.
That seems counter intuitive…but because interest rates generally drop during recessionary periods, homes become MORE affordable to potential buyers. Even though property values are higher, buyer see lower payments provided by those lower rates.
When more people can qualify for homes, the demand for housing increases – and so do home prices.
Mortgage Rates During Recession
When a recession hits, the Federal Reserve prefers rates to be low. The prevailing logic is low-interest rates encourage borrowing and spending, which stimulates the economy.
During a recession, the demand for credit actually declines, so the price of credit falls to entice borrowing activity.
Here’s a quick snapshot of what mortgage rates have done during recessionary periods:
Obtaining a mortgage during a recession might actually be a good opportunity. As mentioned, when the economy is sluggish, interest rates tend to drop.
Refinancing or purchasing a new home could be a great way to get in at the bottom of the market and make a healthy profit down the road.
With that said, borrowers should be market-wise and financially savvy when considering large real estate purchases in a recession.
The Great Recession and Home Prices
Home price appreciation continued during previous downturns, except for what is called the “Great Recession”. While the recession officially lasted from December 2007 to June 2009, it took many years for the economy to recover to pre-crisis levels of employment and output.
So what made the Great Recession different? The housing boom that preceded the last recession was largely driven by an explosion in both home-building activity and mortgage credit.
Home buyers were able to get mortgages with no documentation of their income and no down payment. Many loans had introductory 0% interest periods that made them cheap to start but more expensive as time wore on.
Today, those loan products are no longer in existence.
The growth in home prices seen during the current economic expansion has not been fueled by increased access to mortgage credit. In essence, today’s recession isn’t at all similar to the prior one.
Rather, it’s a simple reflection of supply and demand. Many Americans want to become homeowners, but the supply of homes available for sale is very low, pushing prices upward.
The housing market saw a drop in activity when stay-at-home measures went into effect throughout the U.S. in March. However, the good news is that home prices continue on an upward trend compared to last year.
The National Association of Realtors reports that the median price for existing homes in April was $286,800, a 7.4% increase from April 2019.
Although no one likes to see recession, you can observe that it actually can be beneficial for homeowners and would-be purchasers to refinance or purchase during these periods.
If you have more questions and or would like to strategize about purchasing or refinancing, don’t hesitate to contact me, as it would be my pleasure to help you!
A recent report by ATTOM Data Solutions had some interesting findings:
Sellers reap the greatest home sale premiums as the weather warms up
The months yielding the highest premiums are: June (9.6%); May (8.3%); and July (7.3%). August yields a 6.0% premium
Overall, says ATTOM, home sales completed in May, June, and July usually net 7% to 10% above market value.
That equates to roughly $17,000 to $25,000 extra for sellers.
Judging by the numbers, it would appear that sellers have a solid leg up on buyers in the summer months.
How COVID-19 changes the home buying balance
Martin states “some experts think that the coronavirus could alter the usual summer housing market patterns.”
“Consider that the aforementioned data is based on sales between 2011 and 2019. This year is a hard one to predict for numerous reasons — most of all a pandemic that’s likely to have long-lasting effects.”
“We are in uncharted territory,” says Caleb Liu, a real estate investor and owner of House Simply Sold.
“The longer this pandemic lasts, the more economic damage it may cause. Many sellers may be forced to sell their homes. That means an increased housing supply. And when inventory goes up, prices fall.”
That doesn’t necessarily mean homes will priced to sell quickly.
“But if the pandemic extends into the second half of 2020, I believe prices will start to drop,” says Liu.
“If the pandemic extends into the second half of 2020, I believe prices will start to drop” –Caleb Liu, Owner, House Simply Sold
Real estate attorney Rajeh Saadeh also feels buyers may have more leverage than many expect this summer.
“The economy is still relatively strong. And the buyer pool this year will likely be smaller due to job and income loss. Those factors can help give buyers the advantage,” explains Saadeh.
Remember that mortgage rates have recently dropped to all-time lows. Most experts also predict that this low-rate atmosphere will most likely continue throughout the rest of 2020.
Today is a Good Time to Buy
For buyers with stable employment, good credit, and enough cash for the down payment, closing costs, and mortgage payments, this summer could be an excellent time to make that purchase.
Martin quotes Suzanne Hollander, a Florida International University real estate faculty and attorney:
“Interest rates remain enticingly low,” says Hollander. “And if you live in a condo or apartment with common areas and are worried about coronavirus risks, a detached single-family home with your own yard might be just the place for you.”
Since credit scores have become such an integral part of our financial lives, it pays to keep track of yours and understand how your actions dictate the numbers. You should absolutely build, defend and take advantage of great credit regardless of your age or income.
Yet a lot of people still have doubts as to how credit scores work and why it’s important to make sure the information contained in your credit report is correct.
You can leverage high scores into great deals — on loans, credit cards, insurance premiums, apartments and cell phone plans. Bad scores can hammer you into missing out or paying more.
One of their recommendations is to hire a professional credit repair service – and I really believe that can be a good idea.
Money Magazine writes “when looking at the lifetime cost of bad credit, or if your report is riddled with inaccuracies, paying a reputable company…to help repair your credit is often a reasonable solution.”
Credit repair services can help you with the following items:
Cleaning up credit report errors
Disputing inaccurate negative entries
The Debt Rescue Network – Jennifer Amsbaugh
If you need to improve your credit score to qualify for a mortgage or earn a lower interest rate, I recommend that you reach out to Jennifer Amsbaugh at DNS and see what she can do.
Their program is designed for individuals and families struggling to pay debts while saving money for daily expenses at the same time. They have a particular methodology that has proven to be effective in improving scores.
Jennifer Amsbaugh, Certified Debt Affiliate, Debt Negotiation Services
It seems like those with good credit catch all the breaks when it comes to getting lines of credit. It’s easier for them to qualify, and they get lower interest rates.
Well, there’s a pretty good reason for it.
A person that has good credit has a low statistical probability of defaulting on a loan. Therefore, they are given a lower interest rate. A person with a lower credit score has a much higher probability of defaulting, therefore they are charged a much higher interest rate to cover the losses incurred by lenders by those who do default.
At the very least, your score will affect the type of interest you’ll pay on any type of loan, from home mortgages to credit cards. At most, a low credit score will seriously impact your ability to purchase a house or a car.
If you have more questions about your credit and how it impacts your ability to finance a home, please do reach out to me, as it would be my pleasure to help!
Mortgage rates went from ridiculously low to “still not-so-bad” in just over a week. I can’t say that I recall ever seeing mortgage backed securities and mortgage rates having such gigantic swings in 6 days.
A flood of demand for refinancing combined with volatile credit markets last week caused mortgage rates to actually spike on Tuesday and Wednesday. By Thursday, buyers for mortgage debt had largely stopped making bids.
Borrowers who were looking at a 3.25% or a lower rate on a 30-year mortgage the prior week were quoted 4% on Tuesday and then above 4.25% on Wednesday.
When U.S. mortgage rates spiked last week, the entire market clogged up on Thursday and bidding on mortgage loans essentially stopped.
Secondarily, the Federal Reserve cut the federal funds to near zero on Sunday, adding to their earlier rate cut of a half a percent last week.
The Fed has also stated it will purchase $700 billion in bonds and mortgage backed securities on Sunday. Last week’s Fed injection was to allow banks to have the appropriate levels of cash reserves.
This new one is to bolster markets ahead of potential coming weaknesses.
Nearly all of this was in direct reaction to
the COVID-19 (Coronavirus) threat and fears of an economic calamity that could
be brought on by the virus.
Stock trading was halted for 15 minutes a few times last week due to a 7% drop in the market.
Treasuries tumbled to levels never seen before and the stock market dropped to a point where the Dow officially entered the bear market, ending the 11-year run in bull market territory.
Given all this, mortgage rates should have seen a serious decline last week. Instead, they’ve climbed nearly 0.75% in the last couple of days.
Why the disconnect? There
are 3 main reasons for this anomaly:
Mortgage applications soared 55% last week from the previous week and demand for refinances rose to an almost 11-year high, as borrowers responded to the historically low rates.
Because of this volume, multiple investors actually stopped taking applications due to capacity concerns. Many mortgage lenders would no longer accept locks less than 60 days for refinances. Their systems are stressed and they do not have the capacity to originate, process, and underwrite such an extremely high influx of loans.
Essentially, mortgage lenders are trying to put 10 gallons of water in a 2 gallon jug.
So, investors are raising rates to combat the
surge in an attempt to slow things down a bit.
Out With The Old and In With The New
The surge in refinances has increased prepay speeds for securities backed by recent mortgages. This is essentially shortening the term of the investment and reducing the expected return of previous mortgages by the investor and servicer.
With this increased flood of refis, many previously funded and serviced loans are actually money losers now.
These losses for investors and servicers will see their revenue streams from their mortgage servicing rights dry up. Most mortgage servicers see a break-even of 3 years for each transaction – and most mortgages are kept on an average for 7, so there’s generally a tidy profit for the average loan.
A vast majority of the loans being refinanced
are less than 3 years old – many are less than 18 months old, as a matter of
So, investors are adding in some padded profits to cover those losses…and they do they by increasing mortgage rates they charge to borrowers.
Because of the intense stock market drop this
week, many investors were forced to sell their most easily liquidated assets to
cover stock losses.
Many of those assets were mortgage backed securities
that had appreciated and were easily available to be sold.
In the short term, that made mortgage backed
securities more expensive, forcing rates higher in the short term.
Rate Cut and Mortgage rates
Also, many erroneously believe that Federal Reserve rate cut directly correlates to mortgage interest rates moving downward. As you can see by the piece I’ve written here, the Fed does not control mortgage rates. As a matter of fact, there have countless times where the mortgage rates moved higher the day fed cut the federal funds rate.
that the federal funds rate is the interest rate at which depository
institutions lend reserve balances to other depository institutions overnight
on an uncollateralized basis. This is
not what drives mortgage rates – it does influence them, but does not “set”
Treasury Yields and Mortgage Rates
The 30-year fixed mortgage rate and 10-year
treasury yield generally move together because investors who want a steady and
safe return compare interest rates of all fixed-income products.
This week, that relationship seemed to
disappear, as the 10-year treasury plummeted and mortgage backed securities
increased, due mainly to the 3 factors listed previously.
What Does The Future Hold?
It’s important to understand that mortgage
rates are still extremely attractive relative to historical norms.
Until things normalize a bit, we can continue to expect volatility in the marketplace, although yesterday’s Fed actions could move the market in the short term.
If you haven’t locked and started already with a refinance, then I recommend that you get ready to do so, as timing could be everything. Once the investors clear out some backlog and more economic data comes out (especially concerning COVID-19 ), mortgage backed securities will most likely get a boost and mortgage rates should ease back down once again.
My advice is to stay patient and be ready to move when the numbers work for you.
Secondly, inflation (the arch enemy of interest rates) is low, and the latest measures show that pressures are actually easing…again, good news for interest rates in the long term.
Thomas Eugene Bonetto
Mortgage Loan Originator
About The Coach
Tom Bonetto has been helping his customers and players achieve their best for nearly 30 years. His goal is to provide both a superior customer experience and tremendous value for both his business associates and his players alike.
This is not a commitment to lend. Prices, guidelines and minimum requirements are subject to change without notice. Some products may not be available in all states. Subject to review of credit and/or collateral; not all applicants will qualify for financing. It is important to make an informed decision when selecting and using a loan product; make sure to compare loan types when making a financing decision. Any materials were not provided by HUD or FHA. It has not been approved by FHA or any Government Agency. A preapproval is not a loan approval, rate lock, guarantee or commitment to lend. An underwriter must review and approve a complete loan application after you are preapproved in order to obtain financing.