In this episode, James Anderson, Regional Manager at CapCenter, will be joining the show to shed light on mortgages, home equity lines, and interest rates.
Listen in as James shares his thoughts on the current interest rate environment and what the future may hold, as well as when he believes you should consider a fixed rate. You will learn some other ways that you can borrow money, how the market moves, and when the VA loan is better than the conventional loan.
Listen to the full episode here:
What you will learn:
- Who James is and how he got started in his work. (3:00)
- The "catch" with using CapCenter. (6:45)
- How the rise in interest rates has impacted the housing market. (9:00)
- What James thinks of the current environment and what the future may hold. (11:45)
- When you should consider a fixed rate. (15:30)
- The importance of remembering that rates to go up and down frequently. (20:40)
- Options for borrowing money for home improvements. (24:30)
- When the VA is better than conventional. (31:25)
- How much discount points cost. (35:40)
Ideas worth sharing:
“We want clients to come back not just because they got a good deal, but because it was efficient, easy, and they got service, as well.” - James Anderson
“In a year or two years, we should see rates at least steady off.” - James Anderson
“If somebody has a disability rating where they are exempt from the funding fee, I always will tell them the VA is the best program to go with.” - James Anderson
Resources from this episode:
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Read the Transcript Below:
Congratulations for taking ownership of your financial plan by tuning into the Federal Employee Financial Planning Podcast, hosted by Mason & Associates, financial advisors with over three decades of experience serving you.
John Mason: Welcome to the Federal Employee Financial Planning Podcast, hosted by Mason & Associates.
I'm John Mason, Certified Financial Planner. Here recording with me, Tommy Blackburn, co-host, business partner, one of my best friends, CFP and CPA.
And tonight, we're also really excited as we're recording this with a friend, a business associate as well, James Anderson of CapCenter. So, super excited.
We're going to continue this momentum, every so many episodes, having additional guest, having people inside of the industry that can give some insight that may be above and beyond, Tommy, what we can do at Mason & Associates.
Like James has more knowledge of the mortgage, the refi market. We know a lot about it, but he's got some inside baseball, so it's nice to have him here.
Tommy Blackburn: Oh, he's the expert we go to, just like on previous episode we released, Heather Szajda’s, our estate expert we go to.
So, we like to think we're pretty good, but we know that there are folks with an expertise, it's just so nice to have in your wheelhouse. And James is that one for us on the mortgage side.
James Anderson: Absolutely. Appreciate it.
John Mason: James, how you doing?
James Anderson: Doing great. Excited to be a guest. Really hope I can give you some good answers here.
John Mason: Have you ever recorded a podcast before?
James Anderson: I have not recorded a podcast. And in fact, my wife's really big into them, so maybe I'll get her to listen to it.
John Mason: There you go. Any mortgage or refi podcast out there, that you find interesting?
James Anderson: I know that they exist and honestly, I should be listening to more podcasts than I do, with the amount of travel I've had in the last couple years. But none that I can particularly point to at this time.
Tommy Blackburn: I have to admit, I am amazed at this plethora of podcasts out there. So, I found out that the American Bar Association apparently puts them out for attorneys, and then now apparently, there's actually refi or mortgage specific podcasts. So, it's awesome just to see all these specialized podcasts.
John Mason: I was talking to my sister over the weekend via text message, and I asked her — because I was sharing like we're excited and how the podcast is growing, and we're never going to be as big as like a Housewives Podcast or something like that. We're pretty niche here at Mason & Associates.
But I asked her, I said, “Is there any podcast for Vet Practices?” V-E-T, she's a doctor of veterinary medicine. And they have a, Tommy, like financial planning for vets almost, like how to do finances as a vet. Then they have another one for vets. So, they really do the full gamut podcast out there.
Tommy Blackburn: It's an interesting world. Well, James, how are you doing? I think you moved recently. I'm trying to remember what state you're in now. How are things going?
James Anderson: They're great. We moved down to North Carolina about two years ago. Things are good. We've had our third daughter in April, so we're excited to still be growing. I think we're good though. I think three kids, it's going to be our limit.
John Mason: Well, you're already in zone defense, so that may be a smart move.
James, why don't you give our audience a little bit of an introduction on who you are. So, maybe a brief bio. And also, if you could introduce CapCenter. And then, we'll dive into the meat and potatoes of this episode.
James Anderson: Sure, yeah. I'm James Anderson, I am the Regional Manager of CapCenter. In the last two and a half years, CapCenter has expanded from just having an office in Richmond, Virginia, in Virginia Beach, to having several offices in North Carolina and two in South Carolina. And then, we also opened one in Northern Virginia.
So, anything that is not considered headquarters, runs up to me. And our headquarters is in Richmond, Virginia.
I've been with CapCenter since I graduated college, almost 14 years ago. So, lots of experience. Done a lot of roles here, and just watched the company grow. Company was started in ‘97. So, joining in 2008, I've been here for over half the life of the company. So, just excited to be a part of the growth over the years.
And then yes, of course, the company, we're a one-stop shop for purchasing a home. Also, we offer refinances, we offer realtor services. They can be standalone services; they can be all together.
But we're zero closing costs on the loan side, and then we offer discounts when you use our realty team. We're not a discount brokerage, we are a full brokerage with a discount, as we like to say.
John Mason: Well, James, that's an awesome introduction. And I know Tommy and me, can both speak to a couple of the ARMs there at CapCenter, whether it's the refi side, the insurance side, or even the realty ARM.
So, you guys have done good by us, by a lot of our clients. So, for that, we say thank you, for the excellent service that you specifically, as well as your team at CapCenter have provided over the last few years
Especially when rates were low in getting lower, we were able to work with you to get clients refinance at historic lows, some as low as like two and a quarter and two and a half on a 30-year and a bittersweet.
So, today is September 20th, and we're going to talk a little bit about rates. But those 2 and 3% mortgage rates that we had a year or so ago, are long gone. So, today is September 20th.
So, when we talk rates, if this episode comes out a few weeks from now, it may have changed, but everything we're going to talk about today is September 20th.
So, again, James, thank you for everything you've done for us. And I would just like to say one of the common questions that we get is, “Well, John …” and I've even had friends say, “This seems like a scam.”
Tommy Blackburn: What's the catch? That's exactly what I was thinking. That's the most common thing we get. What's the catch? Where are they going to get me? Like this can't be real.
And John and I, just as sincerely as we can say, is just CapCenter's awesome. There is no catch. We use them personally, no cost, no closing cost and explain you still will have those prepaid items, those escrows that may come in insurance and taxes and so forth.
But outside of that, it's great. The realtor ARM is great from what we've seen. As you said, you said it well, it is a full-service brokerage with a discount. There is no catch.
John Mason: And on the mortgage side, James, after you guys originate the loan, what happens?
James Anderson: Yeah, so after we originate the loan, we do sell it into the secondary market. We do have investors, large banks that most people have heard of, or at least in our industry, folks in our industry would have heard of.
And so, yeah, I think you were basically asking, are we a scam? No, we're not a scam. By no means, zero closing costs does sound too good to be true, and we do have plenty of people who've never used this before, bring that up.
But really, we're just an efficiency model. We have done a lot of volume over the years, the discount that we offer really, we're only able to offer because we're able to do enough volume to make up for it.
John Mason: Well, that's really great, James. And so, today, I didn't check rates today, maybe one of y'all looked at the 30-year rate, but I think last time I looked at it was like six and a quarter.
Tommy Blackburn: I think last I looked was six and a half, James would know.
James Anderson: It's the 52-week high today. So, yes, we're more 30-year conventional. I think what I saw this morning was 6.43, but yeah, right hovering at six and a half.
John Mason: And James, what has that done to … and you don't have to speak specifically to like CapCenter and the business operations, but what are you seeing as far as like volume and numbers? Are you seeing any refinances? Is it only purchases?
And I'll preface this with, a lot of our clients have some military, so they have the VA loan eligibility, and at least what we see in Hampton Roads, Virginia, is the purchase side still seems to be there, mainly because of those active-duty military coming in and going out, every couple years. So, what are you guys seeing at CapCenter as far as flows?
James Anderson: Yeah, from January to present time, our refinance volume has definitely wavered. If I had to put a number to it, I'd say we're doing about 10% of what we were doing in January, on the refi side.
Purchase business, we're still breaking our own records per se, on the amount of purchase we're doing. And a lot of that comes with the fact that we've been expanding into other states, in the last couple years.
So, we didn't ignore that the purchase market was the way to continue to do business, when the rates were to go up. We did not expect rates to go up as aggressively as it has in the last six months/nine months.
Tommy Blackburn: It has I think been a little bit of a shock to all of us. Yeah, John and I were even talking recently about some plans we put in place at the beginning of the year, and we always do these hypothetical scenarios with clients when we're thinking about potential goals.
And sometimes, it's like that vacation home and we're like, “Okay, maybe that'll happen a year or two and it'll be conservative. Let's assume an interest rate of five, maybe five and a half.” And that's when rates were at three and we thought we were being conservative.
So, now, we're kind of having to revisit some of those assumptions. Thankfully, those aren't usually affecting somebody's ability to continue to live a pretty great life. It's just maybe we're renting that vacation home for the foreseeable future, which may not have been a bad answer to begin with.
I did want to go back just say, to things that I know John and I really love about CapCenter and working with you. Well one, you're an animal. You are a highly efficient person, but it's just how transparent your company is. It's so nice to be able to see the rates, be able to see what the costs are going to be, can’t beat the transparency.
And it is interesting when we were talking about that reselling to other large institutions, and I can tell you, it's institutions that everyone would recognize and it kind of blows your mind that it's like if you went to that same institution directly, they would charge you a much higher price.
And so, it is bewildering, but regardless, I am super happy that CapCenter exists and does what it does.
James Anderson: Yeah, we'd have a hard time being extremely competitive with the folks that we sell loans to. Obviously, once they pick up the servicing, they can send you emails, they can call you.
So, we always have to be more competitive and obviously, give 10 out of 10 service, white glove treatment as you may say, because we want clients to come back, not just because we're a great deal, but because it was efficient and it was easy and you got a great service through the process as well.
Tommy Blackburn: So, James, going back to the rates skyrocketing, we know you don't have a crystal ball any more than we do. If you can talk about it, let us know. If you don't have much to say, we certainly understand.
Does CapCenter foresee it getting worse, rates going up further, or do you think we're kind of in a blip, a moment in time, that this will be behind us in a year or two?
James Anderson: Well, I will say a year ago, the forecast was that by the end of this year, we'd be hovering around 4%. So, they actually were … we were forecasting, and when I say we, I'm talking about the Mortgage Bankers Association, economists, things of that nature.
And so, the same folks that made those forecasts a year ago are forecasting that rates will continue to climb, but they should start settling in the spring. And I will say most forecasts are never perfectly right.
In fact, right now, it only seems like it's going up, but I don't think the economy is going to fare well if rates just keep going up and up and up and up. So, this is me speaking, this isn't a stance of the company or anything like that, but I do think that within a year, two years, we should see rates at least steady off.
And I can't give you a rate that I think it will be at, but I do think it's going to come off a high and settle in the next couple of years. Hopefully, sooner rather than later.
John Mason: James, one of my favorite movies out there is Ghostbusters. I'm sure you've seen Ghostbusters, and do you remember in like the opening scene of Ghostbusters, Ray and they go down and they open — they have to get a loan to start Ghostbusters. Do you remember this scene?
James Anderson: I know that my kids wanted to watch this like a year ago, and I remember them getting to Firehouse. I don't know exactly where you're going with it, but so I think-
John Mason: I imagine Ray was-
James Anderson: They talk about the Raider or something like that.
John Mason: They do, yeah. Ray was the responsible one, and he's like walking out of a bank, he's like sweating and shaking his head. He's like, “I can't believe I just got a second or third mortgage at 17%.”
And the movie came out in like 1982 or something. It was early eighties. And it's very telling, very similar to if you watch the movie Groundhog Day. And Ned the head, Ryerson is talking about single premium whole life insurance.
So, if you watch these movies and you pay attention, there are financial concepts that are kind of layered throughout that kind of show you what decade, among the quality of the video and the type of equipment they're using. But the lines are funny.
So, 17% in Ghostbusters, I think was the quote. What's the historical average been? Somewhere in like the 8% range? Is that what we would say is like normal? Are we still below average?
James Anderson: Yes, absolutely still below average. I think it's funny that you highlighted ‘82, because a lot of the articles right now are comparing the movements of rates to the early eighties. This is the last time that we saw inflation be this out of whack, where we had to chase it with interest rates.
But yes, I don't know if we can still say historic lows, but I know that we just got to the point where rates are higher than when I joined CapCenter 14 years ago.
So, the rate has been below 6.5 for the last 14 years, but prior to that obviously, it was higher than that. So, if we're looking at a 40-year timeline, you're talking about 17 in 1982, and I'm talking about 6.5, 14 years ago. And obviously, getting down to three multiple times in the last 14 years, I would still say rates are still good historically speaking.
Tommy Blackburn: So, as we've been talking about rates, I think one thing we have a question on, is we have those adjustable-rate mortgages also called an ARM. What are your thoughts on those? Do you think they make sense right now?
James Anderson: So, for some people, they may. Right now, depending on where you're looking for an adjustable-rate mortgage, a lot of the times the rates are not better than a fixed rate. And really just the easy way to explain it, is that adjustable rates are based off of shorter-term rates, and fixed rates are based off of longer-term rates.
And right now, the yield curve is inverted. Which maybe you guys could explain that a little bit better than I could. But basically, short-term rates are paying at a higher premium, than long-term rates in the marketplace.
So, those adjustable-rates are not necessarily doing a great deal of help right now, but historically, adjustable-rates are lower than fixed-rates. And they are good for folks who know that they're going to only be in the property during the fixed period of an adjustable-rate.
Or if they really need the adjustable-rate to get into a certain property, knowing that they're going to increase their job or their income during that period of time as well.
The biggest example is a doctor; a doctor who's just visiting the residency, wants to buy their first house, but they want to be in a particular neighborhood and they can afford it with adjustable-rate, and they can afford higher payments if the rate ever adjusted on them, as they increase their experience as a doctor and increase their income.
John Mason: Tommy had mentioned capcenter.com earlier, which is the company website, capcenter.com, and they have a purchase calculator. You guys have a refi calculator. I took a peek at that yesterday, or the day before as we were preparing, and it looked like the upfront cost of an adjustable-rate mortgage or an ARM, is actually higher. Did I see that right?
James Anderson: It was, I even looked at it today as well. Yeah, it also has to do with what people are buying in the marketplace as well. For us, we do sell those loans.
So, right now, if the investors are seeing something or the marketplace maybe is a better way to put it, is seeing something, where they think that the ARM shouldn't be valued as much, for whatever the reason is, the pricing is set based off the marketplace. And I guess right now, people don't want to buy adjustable-rate mortgages.
John Mason: And was the quote from the website, if I remember correctly, was it a 7/1 ARM?
James Anderson: So, we currently offer 7/6 and 10/6. I know that at one point, we were offering a 5/6, but I think the demand for it was just kind of shut us out from it.
A 7/6, means that it's a fixed-rate, for seven years and then adjust every six month after that. And the 10/6 would be a 10-year fixed, and then adjust every six month after that as well.
John Mason: And it's really important for our listeners, if they were considering an adjustable-rate mortgage, Tommy, to also look at what number it can adjust by every six months. So, is it adjusting up by half a percent or a percent?
And then also, what's the cap on the upside rate? So, it may not be completely uncommon James, to see an adjustable-rate mortgage start off at 6.5, then over a period of time could increase to like 12.
James Anderson: Correct. So, adjustable-rates are capped at a 5% lifetime increase, with the six-month frequencies of the changes, that can sneak up on you, as much as how quickly it can go up.
Offhand, I can't tell you if there was a cap per adjustment, it's either one or 2% maybe. But it still can creep up to that 5% pretty quickly, if that's the case.
Tommy Blackburn: Yeah, I think based on where this conversation's going with ARMs, I was loving the low interest rate environment. I think we all were, but we would come across ARMs, at that point in time and when I say ARMs, adjustable-rate mortgages that we could refi to a fixed lower forever. So, and we could do it at no cost using CapCenter. So, we loved finding those wins.
And I think it kind of brings us where we’re even going today, which is, based on what we're seeing with those type of mortgages, I think … James, what are your thoughts? I think John and I would say, we're steering clients to let's get that fixed mortgage, lock it in. It doesn't seem like there's much advantage going the ARM route.
John Mason: Well, Tommy, I want to jump in real quick here, just because you got me fired up for a second.
Is the beautiful part about CapCenter (and James, this just occurred to me too), is that maybe a consumer right now would do an ARM, and maybe they would do an ARM because they think, “Well if rates go down, I want to be a participant in that.”
And they're like, “Well, I don't want to have to refinance, because refinance costs money.” Not with CapCenter. So, the reason you would do an ARM, is thinking maybe that rates would come down, but if rates come down with CapCenter, you can just refinance again every six months and take advantage of those dipping rates.
So, James, I cut you off. Were you advising clients? Restating Tommy's question; what's your preferred loan right now? ARMs, 30-year, 15-year? What are you guys doing?
James Anderson: Yeah, I would say that we mostly have done fixed over the life of the company. I did not mention this, but we weren't even able to offer ARMs during the pandemic. Again, it was just a pricing thing, where they were just priced out of the market. And to your point also, Tommy, the rates were so low, you just grab that fixed rate for long haul.
But I will say that ARMs do make sense. One, they obviously have to be lower than fixed rates if you know that you're not going to be in that property within the period of time that it would adjust.
For example, someone buying a first house, but they're planning to hopefully, get married, hopefully have kids. So, it's their first purchase. Let's just make up the numbers, instead of getting 6.5, they can get 5.5, obviously not true today. And they can lock that in for seven years, and assume that rates don't get that low again.
So, they basically, give themselves seven years to make that change in their life, where they can ride that lower interest rate for that period of time. But as we know, rates go up, they do go down. So, we do see a lot of the folks that lock into those adjustable-rates, do eventually lock into fixed-rates as well.
Tommy Blackburn: I think particularly knowing we have CapCenter, which I guess this is important to put out there too, is that unfortunately CapCenter is not available everywhere.
I know I had a client move to Tennessee, and I even reached out to James to see like, “Do you know any competitors out there that maybe we can take a look at?”
It's really nice having your company in our back pocket because to us, usually the default, it's the generalizations. Just like an ARM can make sense, there's always an exception to the role.
But generally let's lock in, let's get the cheapest mortgage we can get. If it goes up, well we won. And if it goes down, we're just going to refinance at the first opportunity. And we're loving these low, low rates. Like you said, ride that thing out forever.
And that was definitely our thought process, was at two and a half percent. And it's starting to look like free money, as interest rates are climbing. You don't get rid of that thing and it's even better of course, with our typical client being a federal employee, where they've got a fixed cash flow to cover that mortgage even in retirement, and they're getting raises with those inflation adjustments. Meanwhile, that mortgage is staying stuck at that very low attractive rate.
John Mason: Tommy, so many great points there, and I guess is maybe we leave this topic and go to the next one is, I think all three of us would agree that if you are exploring a new loan right now, whether it's a purchase — probably a purchase, because you're probably not refinancing.
If you're purchasing right now, I think the general advice would be we're doing this on a 30-year fixed, generally speaking, because the 15-year and the 20-year as James stated, we have an inverted yield curve. We're not seeing significant bang for your buck for that shorter duration.
So, we'd rather see you on a 30, and if you feel compelled to make that 15-year payment, have at it. But if you get laid off or something happens or there's a big oops in life, it's really nice to be able to revert back to the 30, if and when life throws you a curve ball. So, I think-
Tommy Blackburn: Flexibility.
John Mason: Flexibility of the 30 years is the way we would go. Let's talk guys about other ways, that if we're looking to do home improvements or we have some debt, that we need to consolidate. What are other ways that we can borrow that were maybe different than this traditional refi?
James Anderson: Yeah, so obviously, we offer a cash out refinance. But whether or not that makes sense really depends on the balance of the first loan and the amount of money that you need to either consolidate or do that home improvement or use the money for whatever other purpose you see fit.
So, out in the marketplace, obviously, you can get your home equity lines of credit, you can get second mortgages, although I have not seen as many second mortgages advertised out there.
The upside of a home equity line of credit is it's basically a credit card that's just secured by your property. You can borrow against it, you can pay it down, you can borrow against it, you can pay it down, as you see fit.
But I will say the home equity line interest rates are variable, so adjustable-rate. So, they will move with the market. I know that second mortgages might have some more options for fixed, but again, I'm not seeing very many second mortgages advertised out there, just more so home lines of credit.
Tommy Blackburn: What we see there, James, I think is the local credit unions are the ones where we're still seeing some of those offers. I have no idea why, if they just have more flexible lending standards.
But what we've noticed here in the Hampton Roads area, is some of those local credit unions have more of the HELOC and home equity loan opportunities out there.
And John and I, and our firm, and again a generalization, this is not for everybody, we like having home equity lines of credit. Now, we don't necessarily like using them, but we like having them because it goes back to that flexible concept of hey, let's hope we never need it. It doesn't cost us anything or it cost us very, very little to set it up. And we never need it.
But if we do need it, it's just nice to have another bucket to go to. It's nice to have choices.
John Mason: And it's probably not the only option right now, but chances are, like if you haven't been living under a rock for the last 14 years that James’ been in the mortgage business, you refinanced to a historic low, which means your mortgage is somewhere in the twos or threes. If we need equity out of that house-
Tommy Blackburn: We're not getting rid of that mortgage.
John Mason: We're not getting rid of that mortgage, which means we're probably doing a second, whether it's that line of credit, which maybe has a 10-year draw period that you can use and pay off. Or maybe it's that traditional home equity loan where you've got one drop into your checking account and then a 7, 10, 12-year fixed repayment period.
And I think we've even seen the local credit unions on the home equity loans have fixed interest rates, which is kind of compelling.
James, our understanding is that a lot of these home equity lines, the interest rate is variable, it can change monthly, and they're typically quoted as prime plus zero or prime plus one. What is prime? Can you explain to our audience what that means when they're looking at that type of stuff?
James Anderson: So, I will say that adjustable-rate mortgages have changed from LIBOR to SOFR in the last year or so actually. So, basically, it's just how the market moves. And so, yes, you always have a base rate and you kind of lock in to the base rate at the time, and then it will just adjust based on how the market is moving.
I was going to say that I actually hope in a home equity line of credit, as a security blanket as you just mentioned, and when I close on it, this was only about five months ago, I closed it like 5.14 and I think it's already 6.34 or something like that. So, it's already come up over a percent with that home equity line of credit.
John Mason: Awesome James. Thank you for sharing that. I think that really helps us and our audience know a little bit more about how these things can evolve and change over time.
Tommy Blackburn: Indeed, we hit on a cash out refinance and one of the reasons … we've used that tool quite a bit when rates were low and coming down and the reason we kind of stray from that in this current environment, is John, as we mentioned earlier, if we've got a 2.5 or 3% mortgage, cash out refinance is going to pay off the old mortgage and have a whole new lump sum.
We don't want to get rid of that rate. So, that's kind of why in this current environment … and situational, if you have that low interest rate mortgage out there, we really want to preserve that.
James Anderson: So yeah, so I had mentioned it depends on the balances. So, if you’ve gotten to the point where the balance on your first mortgages say, a hundred thousand, and then you have a kid go to college and you're very kind and you decide you want to pay for their college, a lot of those student loans are actually variable out there.
So, if you have a hundred thousand at 3% and let's say a hundred thousand at 8%, then maybe there's going to be a scenario where the interest rate kind of meets in the middle, since those student loans could still go up. So, it really just depends.
So, you don't necessarily want to refinance a $300,000 balance at 3% just to get $30,000 out. So, it's one of those case-by-case scenarios. We would definitely love to look at it for clients, if they're in a scenario where they do have a larger amount of debt that they want to consolidate.
John Mason: I think CapCenter’s typically a hundred thousand or more on refi. So, you're not doing 50 and 75,000 refis, so typically a hundred or more.
And James, adding on to a couple of those points, is from the financial planning and tax side, let's say you did refinance Tommy, that $100,000 mortgage to now 200,000, but that 100,000 wasn't used for home improvements. How do we treat that, as far as like amortization on a schedule A itemized deduction?
Tommy Blackburn: Right. So, what we're allowed to deduct from a tax standpoint is proceeds, the interest on proceeds that were used to buy, build, or substantially improve the home. We used to have a HELOC card or just mortgage debt. As long as there was mortgage debt secured by your home up to a hundred thousand, the interest on it could be deducted.
But now, it has to have been used specifically to either purchase a home, build a home, or do a substantial upgrade, repair, renovation to the home, for that interest to be tax deductible.
Maybe a whole nother conversation too though, with such a large standard deduction, probably most people aren't itemizing, it's probably still just not enough interest to push them over, at least at historic close. I don't know, maybe today-
John Mason: It's getting close now, baby.
Tommy Blackburn: This might start to change.
John Mason: Well guys, we're going to wrap up this episode pretty soon. I think the last thing we want to talk about specifically for our federal employees, who we know many of you listening served in the military and thank you for your service, that means you have VA loan eligibility.
So, we wanted to spend these last few minutes comparing and contrasting VA loans versus conventional, the cost for each one, as well as maybe the rates for each one. And then finally, like jumbo status, because even I'm not clear what happens once we get into jumbo and those VA loan borrowing limits.
So, I'll kick this off in that, many of our clients who have military service have a 10% or more disability rating through the Veterans Administration. If you have that, if you are listening to this podcast and you have a 10% disability rating, you are eligible (my understanding, James, correct me if I'm wrong) for a no funding fee VA loan. And the funding fee is what makes these loans expensive. That's like closing cost and there's nothing CapCenter can do about that.
But if you have that 10%, the VA funding fee is waived. 9 times out of 10, we're seeing the VA is better than conventional. There are some scenarios where conventional may have lower rates, but typically, VA’s the way we're going, James. Any commentary on that would be great.
James Anderson: Yeah, absolutely agree. If somebody has a disability rating where they’re exempt from the funding fee, I always will tell them the VA is the best program to go with.
And if we're talking about a purchase scenario, obviously, you can put down 0% with VA, with conventional, depending on income and things of that nature, if you're first-time home buyer. You can put down 3 or 5%, but you would have monthly mortgage insurance, where you have to pay the MI all up front.
With VA, there is no monthly mortgage insurance in the rates. For the most part. We've seen some weird things since the pandemic, but since things kind of corrected themselves after the pandemic, VA rates have held always lower than conventional rates. So, VA would be the way to go.
John Mason: Awesome, James. And can you talk a little bit more about, like once we start getting into jumbo status, and I don't know where … I think that's location-specific. So, let's just throw out a number like 650,000, if that's jumbo status, how does that work with the VA and the VA borrowing limits as we compare that to conventional?
James Anderson: Yeah, and so, I guess in the last two years, the VA basically came out and said they have no upper limit. It doesn't mean CapCenter doesn't have an upper limit on what we're able to do. I believe we can go up to 1.5 million, but don't do those very often.
But basically, the VA, they used to cap everything based off of the county limit. The county limit for most counties in the United States is 647,200. Right now, it's going up to 715, 715,000 in 2023.
But yeah, basically once you get above the county limit, the 647,200, you become a high balanced VA loan. And if you have all of your eligibility with the VA, you can go to any loan amount that you qualify for. There is (and we can get into this point), what we call secondary entitlement.
So, you actually can have more than one VA loan at the same time, but you can only have the VA loan for a primary residence. So, if you buy a house for 200,000, then 50,000 of your entitlement is used, it's always 25%.
So, there would be a limit on your second loan amount, without selling the house and getting all of your eligibility back or refinancing it out of the VA loan, to where you would have to guarantee 25% guarantee. And basically, it's not called mortgage insurance, but it's basically the VA's insurance of the loan.
John Mason: Awesome. Well, James, I think that's a really great comparison and it helps our clients as they're trying to sift through it and we'll just do another call out to capcenter.com, is if you have questions and you want to do a direct comparison between a 30, 20, 10, et cetera or conventional to VA, the CapCenter website is great, especially for anything that's not jumbo status.
And the beautiful part (plug for CapCenter), guess what? You don't have to put in your email address, you don't have to put in your phone number. It's just a free, easy tool that will help you estimate PMI, your principle and interest payment, and show you a direct comparison to the industry, their closing cost of zero versus the average.
James, we're wrapping this up fast. One last question I have, and then we're going to move into some action items, is real quickly, discount points or no right now, and how much do discount points cost?
James Anderson: So, the rule of thumb for discount points is that half of a discount point, which is half of 1% of the loan amount, should buy your interest rate down by an eighth. Obviously, it does move around and we make recommendation on buying points or not buying points based off of how cheap the points are.
But the rule of thumb also, is that at that threshold, that you won't break even on buying points for four to six years depending on the scenario. So, if you're planning to move within four years, if you're planning to refinance or you're expecting that rates are going to come back down within four years, we do not recommend discount points.
Really, with the way that it is, if you think rates are just going to keep going up and up and up and never come back down, that would be a scenario where we'd say buy discount points. But if we just look at interest rates the last 50 years, they go up, they go down. We don't think where we are right now is going to last forever.
John Mason: I think we would concur with you. Well, why don't we move into some closing thoughts and action items.
And I'll kick it off, is James got my mind thinking down a different path and we know a lot of our listeners on this podcast, maybe you're in like that 30, 40, 50 age range, as well as that older age range. And what that means is you may have kids thinking about going to college, you may have some of these expenses that James hit.
And let's not completely rule out that cash out refinance. It could be a player for you, and if you're a federal employee and your kids are going to college, a financial plan should show you that you can probably afford that and probably also be okay in retirement. So, don't rule out the cash out refi, if you have some of these big expenses coming up.
Tommy Blackburn: Yeah, I think another action item for me would just be always looking at that balance sheet. What can we do with our cash right now? Maybe if we have a high interest rate, maybe it's time to start paying that mortgage down some, let's see what the interest is on our debt.
Maybe consolidation can make sense, I bonds can make sense. And go check out CapCenter, as you're thinking about your options, because it's so transparent as John just said.
James Anderson: I will say just some of the conversations I've had with folks recently, people that are kind of pushed away from purchasing their home, whether a first-time home buyer or whatever the case may be, because rates have gone up — that might not be necessarily a good idea, because if rates only go up, then these are the best rates you're ever going to see. And if rates go down, then right now, you're actually in a state where the market is balancing.
So, it's not that crazy seller's market right now, where every house is getting 25 offers. It's a little bit more competitive. Listings are still kind of limited out there. But if you can afford it right now, getting that home, it might still be a better idea to buy now rather than wait, because rent prices are going to increase with the increase in interest rates.
John Mason: Well, there was a saying before, “Rent is too blank high.” I don't know what we're allowed to say on a podcast, but you guys can fill in the blank. Rent is too dug on high. And I think James, you're right, it's only going to continue to get higher.
So, thank you James, for being a guest on the Federal Employee Financial Planning Podcast. When this goes live, remember, rates as of 9/20 is what we're talking about today. If we ever see rates come back down, James, we’ll have you back on.
So, thanks again. Capcenter.com, J. Anderson at CapCenter.com is how you get in touch with him. Virginia, North Carolina, South Carolina and more. So, CapCenter can help you in all those ways. And oh, by the way, we're not affiliated or compensated by CapCenter, in any way.
Also wanted to send a big thank you to you our audience. We are loving putting out this content. And it's even more fun as we see the downloads, the followers, the presence on social media. As we see all of this growing, we continue to be motivated that we're reaching and connecting with you.
And we'd love to hear from you. Leave us a five-star rating if you think that's a great idea, comments would be awesome. We want to know how we're doing and how we can improve. You can either do that directly in the comment section or you can send us an email to Mason FP like financial planning, masonfp@masonllc.net.
You can find us on Facebook and LinkedIn, Mason & Associates, LLC. So, Mason & Associates. Thank you again to our audience. Future episodes coming up. We're going to do more of these interviews. Tommy, who do we have up next?
Tommy Blackburn: So, the next one we've got planned, I believe is Jeff Hybiak, from SEM Wealth Management. SEM Wealth Management is a subadvisor for our firm, of how we manage investments for our clients. So, we're really excited to have him on and talk about some portfolio management market, just various topics. He's a wealth of knowledge there.
John Mason: Alright, well this has been another episode of the Federal Employee Financial Planning podcast. Thanks for listening. Thanks for being a part of Mason & Associates and we look forward to being with you next time.
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