Last Week on Reddit - September 26 2022
10 min read
Written by Peter Khoury
The recap of our last week of helping out home buyers and home sellers on Reddit, brimming with mortgage and real-estate advice from an experienced Realtor and loan officer.
20 yr at 5.34% or 30 yr at 5.54%?
Reddit user u/dmvlegend asks:
“The 30 year is roughly $500 a month less. My wife and I have two young kids so our budget is somewhat tight at the moment. We had planned on the 20 year but the 30 is tempting. Thoughts? Thanks”
This user brings up an interesting dilemma that many home buyers have to go through. Obviously the 30 year mortgage is cheaper month-month, but their ideal loan scenario is obviously to pay off the home in a 20 year span. So what’s the best decision in this situation? I respond:
“if I was in your shoes, I would ask myself what is my ultimate goal with this home. Is it to pay off faster or is it to cash flow more money and keep some in my pocket?
- You can always stick $500 extra a month on your mortgage now and pay it off faster.
- 20 bps different for 10 years doesn’t seem like a significant savings and leaves opportunity costs out.
- How much interest are you paying on 20 years vs 30 years. Take the 500 dollars a month and buy recurring treasury bonds (safest).
- If I stick 500$ initial deposit and 500 recurring for 30 years earning 3% (not much) you’ll be left with 290k!!!
I would probably take the 30 year and really put the 500 to work each month. Try and earn more than 5.5% on that 500$ for a fun game. Who knows you might end up making some good bets.”
Savings vs returns
Day-to-day affordability is the most important aspect of your mortgage, and as we can see in this example, the higher interest rate loan has a lower monthly payment - which is more sustainable and less risky in the long run. Especially considering this individual says their budget is tight, and they have two young children. Keeping your monthly costs low and maintainable is vital, and you never know what might happen to reduce your income or reserves.
Another key to my point here is that you can earn more money by investing that extra $500 per month than it would cost you in interest. The opportunity cost of putting those $500 dollars to work elsewhere, on treasury bonds for instance, will likely outweigh the money you would save on interest over the course of the loan.
Of course, if your goals are centered around paying the house off in a 20 year window, that’s perfectly acceptable as well. Everyone has different goals that deserve unique considerations.
How much loyalty to a mortgage broker?
Reddit user u/frisbeeguy asks:
"We went under contract on a new build last fall, pre-approved with the builder’s mortgage company at 3%. We talked about locks back then but not much available for a year out (and a year would not have been long enough). Several months ago we started talking to a mortgage broker and got a 90 day lock which wasn’t long enough. We got an additional lock for 90 days, which should just be enough, 5.49 and a point.
My partner talked to another broker and they can get us a jumbo for an eight of a percentage point lower, with a point. It will also be a jumbo which will allow us ten grand less down payment. However, I feel bad leaving my other guy, when we got the second lock I verbally committed to following through, and he has put in the work for us the last 4-ish months. Am I being fooling for thinking I should have some loyalty to the first guy?”
This is an incredibly common sentiment, a ton of buyers feel loyalty to their lenders and realtors for a variety of reasons from having built a personal relationship with them, to feeling indebted to them for the amount of time they’ve spent on your transaction. I responded:
“Hi! As a direct lender, I run into this ALLL THE TIME! It's frustrating but at the same time, its business, nothing personal. Here is my take on it... and there is no right or wrong answer. If you are loyal to the service people you like, good for you. Give them the chance to match but I will tell you first-hand experience. No two lenders are exactly the same. Everyone has different margins built-in and products.
There are times when I lose a customer and times I win. Sometimes I am .5%-.75% on the rate cheaper and the customer doesn't want to jump ship when saving 300$ (just happened this week). The customer felt bad because the broker was working with him for 1 year. Honestly, I respected his decision. There are times I lose a deal over 50$ and $1000 in cost. Their is no right or wrong answer. Its just business, do whats right for your family. I ALWAYS SAY... You are the one paying the bill, not me, not the realtor, every 30 days rain or shine, that bill needs to be paid by you.
I will tell a secret of the industry, there will always be someone cheaper. Every lender is not the same. Direct Lenders and retail banks are gobbling up loans because the rates are finally appetizing to lend. Brokers are having a hard time because there loans are all Fannie/Freddie which goes on the Feds balance sheet. And the Feds have made it REALLY CLEAR they dont want debt right now.
Side Note: just be careful, if you want to compare lenders. I would get Loan Estimates and make you judge Section A between them.”
It's all business
Essentially it’s all fair game. Loyalty is commendable and it’s heartwarming to see so many people prioritizing it, but realistically this is a transaction — and you’re going to be the one paying for the mortgage. There’s nothing wrong with searching for a better deal, and there’s always going to be one out there.
Good lenders get out-competed all the time, if your current lender can’t compete with a rate from another lender, you should make the choice that’s best for you and your financial future.
All’s fair in love and loans.
Curious. How are interest rates affecting you? We are kind of at a stand still with buying because of them.
Reddit user u/HawkqueenYOLO asks:
“This March, we could afford to purchase a $625,000 home. By May our price range went down to $575,000 in our area (due to interest rates). Fast forward to now and we are at an even lower price point: $500,000- $525,000. Home prices are dropping in our area significantly, but I am finding it's still too large of a gap. For example, the 625k home might now be listed for $595k, but that's still too high for us. A $575k home is now $550,000 but that would over our monthly budget. And of course it's hard to mentally wrap our heads around what we could afford just a few months ago to now. 100k less is a pretty huge jump.
We have the option to put more than 20% down to help with the monthly payments, but we are hesitant to do so and spend an even larger portion of our reserves. So as of now we are just waiting to move back into our small home (1000 sq ft that is currently rented) unless a home comes on the market that we love and is within 500-525k.
Wondering how everyone else is fairing out there. While home prices are definitely dropping, inventory is still very low and home prices aren't dropping enough to offset the rise in interest rates. Is anyone experiencing the same thing or are you experiencing a benefit to the higher rates? OR are you just settling?”
With interest rates increasing and home prices finally dropping, tons of home buyers are feeling uncertain and apprehensive about pulling the trigger. We’re in a transition period, and it’s hard to know whether you should wait until the dust settles. I respond:
“We are in a period of adjustment with pressure puts on demand which should trickle into more supply and price cuts to balance the equation more. Interest rates will affect house prices it will just take time. This doesn't mean I’m advocating for you to wait, because the higher the rate means higher payments. A seller "doesn't" have to sell his home. It's so multi-faceted that he can rent, airbnb, daycare, nursing home, I mean whatever you want to keep it running. I saw an app that lets you rent out your pool to strangers like airbnb for just the pool (4 hours at a time). Also another app to rent out your driveway space in more dense cities.
- Is the home affordable, and can you afford it long term. During a recession more importantly. Look at your job. Are you a doctor (rain or shine you are making money) or a real estate agent (very cyclical market).
- You can always ask the seller to buy down your interest rate by 1-2% and that will cost them less then chopping down the purchase price. I know some people will say thats dumb but ask yourself is it dumber then the seller taking it off the market and renting it out, waiting until things are stable again?
Anyway - If you need to bounce ideas, Im all ears!”
Let's talk market uncertainty
It’s important to consider that while house prices will go down due to the increase in interest rates, your monthly payments on your mortgage might stay the same as they are now, or even increase depending on how much rates will tick up. So it’s not necessarily correct to think “getting a house will be cheaper” in the short term, the long term is another story. But there’s also the opportunity cost of not owning a home and dumping your income into rent, while you could’ve been building equity and getting tax benefits.
Home owners have more options than ever for getting income out of their home, and aren’t necessarily being pressured to sell in the current environment, so it’s difficult to say how quickly we’ll see seller’s adjusting their prices to match buyers’ purchasing power.
While interest rates and general housing prices are important considerations, the far more important aspect to think about is affordability. The benefits of owning a home and paying into equity are wide ranging compared to renting. If your job is stable and recession resistant, and you’re able to comfortably afford your monthly payments, it’s almost always better to purchase a home. Instead of paying for another person’s mortgage you can gain equity in your own, get tax deductions from your purchase and mortgage payments, take out equity in your home for future repairs and so many more financial hacks that home owners take advantage of that renters don’t have access to.
Another tactic I bring up is getting a seller to buy down your interest rate. You can get them to buy down your rate instead of getting them to lower the price on the home, resulting in a more affordable payment for the buyer and having the seller maintain their asking price.