Are you a federal employee curious about the best mortgage strategies in today’s market? In this episode, John and Tommy are joined by James Anderson, Regional Market Manager at CapCenter, to explore how inflation, interest rates, and economic resilience impact federal employees looking to buy or refinance. Learn why interest rates might improve over time, how to navigate today’s market without waiting for rates to drop, and how federal retirees can downsize smartly.
James also explains why CapCenter’s commission-free structure makes it unique, the benefits of VA loans over conventional ones, and why PMI isn’t something to fear. With practical insights on rate locks and the definition of income for mortgage underwriting, this episode offers federal employees a roadmap for making informed decisions about their homes.
Listen to the full episode here:
What you will learn:
- What has happened in the last three months in terms of inflation. (5:30)
- What you need to know about the Fed dot plot. (8:00)
- Where are we today with interest rates. (9:50)
- What mortgage rates historically average. (12:15)
- Why CapCenter employees are not commission-based. (21:00)
- How CapCenter payments work. (26:00)
- How a federal retiree can downsize—and how CapCenter can help them. (34:00)
- The value in having a financial planner in your corner. (38:50)
- Why a VA loan is better than a conventional loan. (42:20)
Ideas worth sharing:
- “The economy is very resilient when it comes to jobs.” - James Anderson
- “We have confidence that rates—maybe not today, or tomorrow or next week—are going to be better than yesterday or the day before … rates are going to continue to get better over the next couple of years.” - James Anderson
- “You need a village to help you through these financial decisions that you only go through once or twice in a lifetime. It doesn’t have to be so lonely, and you don’t have to make these decisions in isolation.” - Mason & Associates
Resources from this episode:
- Mason & Associates: LinkedIn
- Tommy Blackburn: LinkedIn
- John Mason: LinkedIn
- James Anderson: LinkedIn
- CapCenter
- Mortgages, Home Equity Lines, and Interest Rates (EP24)
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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. I'm John Mason, President and Certified Financial Planner at Mason & Associates.
And today on this episode, I have my normal co host, Tommy Blackburn, who's a CFP, CPA, and a personal financial specialist. And we're honored to have a returning guest. I think it's our first returning guest. On the Federal Employee Financial Planning Podcast, it's Mr. James Anderson, who is a regional manager with CapCenter.
CapCenter has done a lot for our clients and for the community. They serve as a realty branch, they have a purchase and refinance market, and they also have an insurance department. So they can help in all aspects of purchasing a home, refinancing a home, satisfying your insurance needs. So they're licensed in a variety of states.
On the purchase and refi side, they can help you from Maryland to Florida. On the realty side, from Maryland to South Carolina. And insurance across all of the same states. CapCenter, NMLS ID number 67717. And you can get more access at NMLSConsumerAccess.org. So phew! Big introduction there. James Anderson, Regional Manager, CapCenter, currently located in Richmond, Virginia.
And I want to throw this out right as the beginning as I've personally used CapCenter. Our clients have personally used CapCenter. Tommy's personally used CapCenter. So this is not necessarily an endorsement, but it is just a disclaimer that we have used their products. We have used their services and we've been generally happy.
And so have our clients using James and his team at CapCenter. So as you listen to this episode, just know that it's coming from an area of personal experience but we're not being paid or compensated to record this episode with James. James, how are you today?
James Anderson: I'm good. How are you guys? Good morning. I appreciate, I did not know I'm the second or the first person to be a guest for a second time. So I appreciate that. Cause that means something, right?
John Mason: Absolutely. You've been such a strategic partner for us for years now. And as we're getting close to wrapping up the third year of the Federal Employee Financial Planning Podcast, it's amazing to think you were in the first 20 episodes that we did.
And we'll link that episode below in the description, the first episode we did with James and hopefully we're good enough as hosts and our experience as podcast hosts, it's not a repeat of what we've done previously, but it'll probably be interesting for you audience to go back and listen to one of the first 20 episodes that we've recorded with James.
The market was in a different place than it is today. So there should be a pretty decent contrast between the two episodes. Don't you think, Tommy?
Tommy Blackburn: Yeah, I do. One, it's amazing to think it's, we've been going for three years now and that James was, I think, actually, technically, I could be mistaken, but I think it was episode 24.
So definitely one of our early ones. It was a very different—yeah, a lot has changed in a little bit of time, and that seems to be the theme. There's always always changes to life, changes to the environment. Some things stay consistent across time, but always little changes or big changes along the way.
John Mason: No doubt. It's a pat on our backs to tell me that we've been able to do this podcast for three years now. It's certainly not easy to meet a couple times a month to record these episodes, and it's a big lift for us, and I know we're motivated by our listeners to continue producing high quality content and better content each year.
So if you're one of those listeners and you haven't subscribed or you haven't hit the bell notification, you haven't left us a review or a comment, I'm just saying that, yes, we know we've had some clients that have generated from this podcast and that's awesome. But if you're one of those DIYers or you haven't made that leap to contact us yet, it wouldn't hurt to give us a little more motivation to keep doing this.
So some likes and 5-star ratings or reviews would be awesome. Keep us motivated and we'll keep producing high quality content for you. So James, let's dive in to the meat and potatoes, which is, I'm sure people are tuning into this episode because they want to hear about interest rates. They want to hear about purchasing.
They want to hear about refinance opportunities and at Mason & Associates, we are very aware of what's going on in things like realty, markets, interest rates, and these sort of opportunities, but as we were joking before we hit the record button, we did such a good job helping our clients lock in at 2% or 3% that admittedly, I don't go to the CapCenter website as much anymore because I don't have to.
But back in the heyday, I was going to CapCenter website every single day, like clockwork to stay engaged with what's going on. So for Tommy and I's benefit, for our audience benefit, if you could just share with us, where are we? What's going on? What's happening? The Fed's cutting rates. Everybody's got these assumptions.
What are you seeing since you're in the trenches every day?
James Anderson: Oh, yeah. We've definitely come off a high from the last couple of years. Obviously, the COVID times is when rates were at their rock bottom. And then they very quickly on us went sky high. We have some folks that we closed last year that were in the high 7s and even the low 8s.
And right now, we're in the mid 6s, if we're just talking about 30 or conventional. But, what's really happened the last, let's call it three months, is that the CPI data that came out about three months ago and PPI data show that inflation is taming, right? So we know the Fed has two jobs: one to take, keep inflation under 2% and to keep jobs or on the unemployment rate as well as they can.
The mission for them the last few years has been to tame inflation. As we've continued to get better inflation reports, rates have come down a little bit over the summer. We got a very favorable one in July. And with that is when the confidence in the marketplace was close to 100% of a rate cut in September.
But there was 25 basis points, 50 basis points. That was a little unknown. But there was a jobs report, I think it was either right at the end of August or right at the beginning of September that came out that showed unemployment went up and that suggested that the economy was actually weakening on that front.
That gave them the motivation to do the 50 basis point rate cut. Actually, before they actually did the 50 base rate cut. We were at the lowest we'd been at probably, it wasn't two years, but it was getting close to a two-year low. Some of our scenarios, we were at the high, like 5.875% on the third year.
And what's happened since, the inflation data is still coming out, As expected, we'll say. But, we got another, I think it was about three weeks ago at this point, another jobs report that came out said, no, the economy is actually really resilient when it comes to jobs. And so what we've seen the last, since the rate cut, is signs that suggest the economy is actually still very strong, and it actually doesn't call for the Fed to be as aggressive as was originally thought on the November rate cut and December rate cut that are coming up.
There's still a lot of reasons why they would still cut the rates, but maybe not a whole point by the end of the year or even 0.75%. Maybe it'll be a half point. And then one thing is, this will be my last comment. I'll let you ask more questions.
The Fed dot plot. If you just go look at it, the Fed dropping rates is not one to one with mortgage rates, but they are still going to generally trend in the same direction over long periods of time. So the Fed dot plot still has the Fed decreasing rates over the next two years to the point where we still have confidence that rates maybe not today or tomorrow or next week are going to be better than yesterday or the day before.
But rates are going to continue to get better over the next couple of years.
John Mason: James, thank you for sharing where we are in current markets. So you said a lot of good information there. And I want to make sure that, one, that I have a good understanding of everything you said, but two, for the audience's benefit.
So where are we current interest rate? And for the audience's benefit, one of the things that we love about CapCenter is that you can go to CapCenter.com and they've got purchase rates, refi rates. You can compare conventional mortgages, VA loans, FHA loans. You can look at how PMI, it's a PMI estimator.
You can look and see what happens if we don't have 20% down. And then we're going to get more into things like closing costs and how CapCenter wins and does business. But their website is awesome because you don't have to submit an email to get these rates. It's just fully transparent, very easy.
So where are we, James? Current rates, where was the lowest rate we've seen so far in 2024? And then I'd love you to expand on—maybe I'm bad. I don't claim to know everything. I have never heard of a dot plot. So I'd love to hear a little bit more about the dot plot. Where you access. Is this a published thing?
And maybe I'm naive, and hopefully the audience will forgive me if I should already know this answer.
James Anderson: The first question was where are we with rates now? We are in the mid 6 on conventional 30, assuming good credit. Obviously lower credit, higher rates. But VA loans, FHA loans, we are floating around 6 over the last few days.
I've definitely seen, high 5s and then, a little bit lower 6s on some of those different scenarios. Since we lasted this podcast, we've updated our website where it's actually more exact on the sense of someone puts in different loan amounts, the rates might be different loan to values or, equity positions, the rates will be different.
It does assume a 7 to 8 credit score, but it is a little bit more dynamic now than it was when we recorded, I guess that was, I don't know, two years ago, three years ago at this point? And then hopefully I'm not skipping a question, but the Fed dot plot. So they don't do this at every Fed meeting, but the different, we'll call them the board, the different members of the Fed board actually predict where they think that they're going to be voting for rates to be in the future.
So it is public information. You can find it online and you can just see where they think the federal funding rate might be over the next eight quarters or two years.
Tommy Blackburn: And part of what people are looking at there is so they each put their forecast in and then they put it on a plot together.
It's like, where are these dots bunched, right? And that's the consensus of where we think it's going. And you may have some outliers.
James Anderson: Yeah, I think I looked at actually a week ago with a client and I think it still shows most people were putting their dots around 5% for the federal funding rate, or maybe it was four for the federal funding rate.
By the end of next year and then 1% lower than that the following year in 2016.
Tommy Blackburn: And James, I'm curious, so 6 low, I think we said mid 6s is what we're hanging out at right now from a his sometimes I just think it's helpful to put it in a historical concept. We let in and we're giving ourselves high fives about locking in.
Historically low rates when that was available, which is what we believe in doing around here. We dance to the music that's being played, make lemonade. You always look for the opportunities, but from a larger historic, what do mortgage rates historically, what do they average?
James Anderson: When I joined CapCenter 16 years ago in 2008, we were floating right around where we are now.
So in my lifetime in the mortgage industry we're at the highs or at least, in the last two years we've been at the highs, but, prior to that we'll definitely get some clients who've been homeowners for a lot longer who says, “I'm not scared of a 7% interest rate. Here's my story. I had 14% when I bought my first house in 1985,” or whatever the story may be.
But rates definitely were in the teens many years ago, but I do think, well below 10% is going to be the new normal forever. I would be very surprised if that wasn't the case, but one thing I looked at, this was a few years ago, was my parents first purchase.
What was the purchase amount? What was their interest rate? And how much did they pay for that house over time? I don't remember the exact numbers, but let's say they bought it for $120,000 and the rate was 12.5%. Looked at the total interest paid, and then I compared, I looked at the exact same house they bought for it.
Based off the value presently with the same percentage of down payment and current rates. And the amount that was paid for the house was actually very close. Even though the difference was 30 years at the time. Just because, obviously the lower rates allows values to go up. And so it's a, you pay with the higher rate and the lower purchase price or loan amount.
The only way for prices to continue to go up and people to be able to afford it is rates going to have to stay a little bit low. There's still plenty of interest out there on loans for the industry overall.
Tommy Blackburn: From what we see, it's an interesting dynamics going on in the market. One that is interesting that we got back to the same answer, just with different variables.
But it seems like today there's not enough housing inventory. Particularly, it seems like that middle tier, beginning housing inventory seems to be a shortage for people. Another thing that I guess what's interesting to me on this conversation, and we probably shouldn't spend too much time on interest rates we've covered a bit, is that I have always believed they are notoriously very difficult to predict and get correct. Particularly on a short term.
Which, I think this recent history has proven that where people have said, One, the market moved ahead of what actually happened to what you said, right? It was already pricing it in, and now it's pricing in new information.
And John and I have hung out with other advisors, and we've heard some, very passionately say, “We know interest rates are heading down,” and we're just like, “Ah, I agree that I think it's likely, but I don't know,” that I would say I know because there's a lot of dynamics at play and one, one, I guess a piece of food for thought for people that as to why maybe they wouldn't move down.
That I would say despite what the Fed is thinking from what I'm reading and my understanding is that the same time the Fed is also. I don't believe they're purchasing mortgages like they were when they were doing quantitative easing and they've since, so now you don't have the same demand to buy those and, or the same supply.
So there's a supply-demand dynamics here as well that affect interest rates. Just want to say don't feel so convicted, everybody. It is complicated. There's some very good general educational pieces and having a plan in place and thinking about the bigger picture. But just like the markets, interest rates they can burn you if you're not careful.
James Anderson: A lot of us say that if we knew what rates we're doing, we wouldn't be working here. We'd be on Wall Street. And yes, you're very right. And we don't know the short term. A lot of folks, we say this all the time is, you have 7.5% from when you bought this house a year or two ago, don't wait for the rate to go to 6 again, cause you might be waiting.
Let's go ahead and save that 1%, and then, with us, you can refinance, again, with zero closing cost, and we'd be happy to save you money twice down the line.
Tommy Blackburn: One of the reasons that we are such big fans of CapCenter, exactly what you just laid out. I think all the advisors here look at it as if everything else aligns, yeah, go do exactly that.
And if we get a chance, we're just going to refi with Cap Center again and ride this thing down. If rates go up, you're sticking at your lower rate. And then I guess it still is a little bit of a time frame concern of just like how long are you going to be in this house? Because we do have to think about the house could fluctuate.
So there is, that concern, but by and large, that's one of the wonderful things about CapCenter. You get so much flexibility by not having that friction of the closing cost. Which, John, I know we want to jump into kind of if CapCenter's not making their money there, where are they making the money?
John Mason: Yeah, I think we just need to make it crystal clear for the audience that we are saying there is no closing cost with CapCenter and that's not a fib, that's not a fabrication. This is actually a thing and at least the rule used to be that you could refinance with CapCenter every 6 months. So the idea of waiting for the perfect time to hit the refinance button or waiting for the magical you have to drop 1% so you overcome the fees.
That's not part of the conversation with CapCenter. For us, it's really easy because we're financial planners and we have all this data available and we can submit a loan application in 35 seconds. If you're not a financial planner and you don't have encrypted email software and et cetera, it's a little bit more cumbersome for you. We get that.
So maybe where Tommy and I would refinance every quarter point down maybe you listeners, maybe your barriers, 50 basis points down or 0.5%. So everybody's got a threshold of success. Just know that with CapCenter, we don't have to drop X percentage points or a certain amount to make it worth it that you can save money immediately.
So I do want to talk a little bit and we might as well hit it James immediately and then I'll go back to maybe some other points that I have, but zero closing costs. How does CapCenter make their money? And I do want to also throw out a disclaimer that we're recording this podcast episode on October 23rd, 2024.
A lot can change very rapidly. This will probably air mid-November to early December, so just know October 23rd is the day we're recording, so don't barbecue us if this is released and things have moved a bit upon release date. So James, how does CapCenter make their money? Explain that to us, and then also maybe you can share with our audience if how you make your money is in some way negative to them, because I know that's a vague question and maybe I'll firm it up after I get your answer.
James Anderson: We get this question a lot: are you baking the closing costs into the interest rate? It's really, we get that question all the time. The answer is our product is zero closing costs with competitive rates. So we're not always going to be the lowest, but we're not going to be the highest either.
We're going to be competitive. We look at our competitors all the time to make sure we are aligned and by all means winning the deal all the time with our model. The question of how do we make money? We are a lender. So ultimately we have investors who are competitors also that we sell our loans to.
And I always use a clean example. It's not exactly how it works, but if we were doing $100,000 loan, And we were able to sell it for 103%. Our revenue would be 3000 bucks, right? Let's say the closing costs, again, making up the number is a 1000 bucks to us. So we make 2000.
Whereas you go to the bank down the road, they make 3000 on the same deal because they don't pay the closing costs. But if CapCenter was able to do two loans and that Bank X down the road was able to do one loan, they make 3000, we make 4,000. So ultimately it's a volume. We've always been a volume shop.
Our employees definitely work volume. And also our employees are not road warriors, as you may say. A lot of sales people, commission based people, they're out trying to get their own business. CapCenter, we are very much our own brand. We don't necessarily brand individuals in a sense.
And people come to work and are handed business to work on, clients to work with. So it's definitely a different model, and none of our people, realty and loan, are commission-based. They're salaried employees. They make a little widget per transaction, but it's not a commission.
It's flat. It doesn't matter if the loan's a million bucks or a hundred thousand bucks.
John Mason: So it's an interesting model because a lot of the other mortgage lenders out there or people who are pounding the pavement, they are commission-based. So they're very incentivized to go out and attend rotaries and other local networking sections to drum up business.
Whereas CapCenter, the firm is doing that through radio advertisements, website. I think I've even seen YouTube advertisements where CapCenter pops up. So y'all are driving the business and I don't mind sharing this, and I hopefully James, you don't get mad at me for doing it, is your employees at CapCenter are W2 employees, and they're not commission-based.
Occasionally, we can all hire somebody who's not a go-getter. And because they're not incentivized to get a commission, they may not be always the most go-getter individual. Now, James is a go-getter. James has always done everything we've needed him to do for our clients, but I think just pointing out that generally speaking, you're dealing with a different mortgage office than you have before.
They're going to get paid. They're going to do a good job for you. They just might not be, as hungry, to close it as quickly or hound you every day for paperwork because they're getting a salary regardless.
James Anderson: My wife isn't always happy with how available I personally have been and am all the time.
It's going to take an out-of-country trip for me to actually not take my computer and turn my phone off. One of these days, right? But yes—
John Mason: I was debating giving everybody your cell phone number just in case.
Tommy Blackburn:Don't do that to them.
James Anderson: My cellphone is technically paid for by CapCenter, so you are happy.
You can give out myself a number. That's fine. Yeah, if you just think of it as a very general item are our loan officers less available than a commission based loan officer? If you say it on an individual basis, like we could say yes to that, but we as a company have coverages where if someone is going to be at a softball tournament over the weekend, put an out-of-office. So if someone reaches out to you there's someone that is giving contact information that is available.
So we're not doctors or nurses or anything like that, but we've definitely had people on call as, in a sense. We had a Saturday hours, especially during the busy purchase market, which, in spring and summer, we don't currently have that, but we've had employees that are required to work Saturdays.
We've had our client relations team available on Saturdays. Sunday's maybe the sticky widget there, but a lot of the times, list agents are calling the number on the pre-approval and our purchase loan officers know that it could be the difference between a client winning a house or not winning a house.
We are definitely available, but, absolutely understood that a commission-based person is going to be up till midnight if they have to be, and we might still go to bed at 10.
John Mason: And to be clear for the audience, this has never been an issue for us, and Tommy, I think we can probably share that we continue to get better at delivering the CapCenter message.
So I'm going to share one thing on how I've gotten better about sharing the CapCenter message. And then I'd like you to—we always say there's no closing cost, but then people get to closing and they might have to write a check. So I'd love for you to touch on that part, and then I'll touch on how I've better positioned CapCenter over time.
At one time, I was recommending CapCenter and I'd say, “There's no closing costs, it's great.” And then I had one client, did the refi, no closing costs. And then they were mad. I'm like, why are you mad? What happened? This was perfect. They're like, “Can you believe they sold my loan before I even got to pay them one payment?”
I'm like, “Oh, yeah, I can. I knew that was going to happen.” They're like, “I just can't believe they sold my loan immediately.” So now, that's how CapCenter is making their money. They're going to try and sell your loan. I think the three or four times I've refied with Cap Center, I think I've paid Cap Center once, during that like interim period.
So I've gotten better, Tommy, basically sharing with clients. Yes, this is what you can expect. Maybe one loan payment to CapCenter. But if they get their job done really fast, your loan's going to be sold to Wells Fargo or Mr. Cooper or wherever you guys are selling loans to. And at the end of the day, unless you have a moral obligation with paying Wells Fargo, there's really no negative in having your loan sold to a loan service provider that's going to collect those payments over time.
I know there's some of you out there who really love Navy Federal Credit Union and you want to originate your loan through NFCU, you want to pay interest to NFCU, you love NFCU and that's fine.
You can do that and just understand it may be a little bit of a higher cost for that loyalty. So Tommy, how do we better position? There's no closing cost, and then all of a sudden you wake up at closing and you may have to write a check.
Tommy Blackburn: Yeah, so I'm the same as you. I explained the model, which I think explains your loan is going to get sold because that's how they make their money.
So just realize that's what you're in for, but it is a a streamlined process. Also wanted to mention, John, I have encountered this many times too. A lot of times the documents are put in front of folks that it says it in writing and we see this with the state planning documents all the time too, where it's yeah, the lawyer did tell you how they were going to get paid, you just didn't read it.
Probably because you had a lot of documents. And I'm just saying all this and that I'm pretty confident CapCenter puts something in front of you that's, “Hey, we're going to sell your loan. You might make that one payment, but expect to make it somewhere else later.” So they try to communicate that message as well.
On the closing cost, you told me there was no closing costs. And this is another part that John and I, all the advisors here, communicate. Just because there's no closing costs doesn't mean you're not going to write a check. Why would we sound like very conflicting things? And the reason is because you have other items baked into your mortgage that are not closing costs.
Things like real estate taxes, insurance, paying various deed taxes, and recording fees, and so forth. That is so you're pre-funding your escrow account, and you're paying for those items that those are not CapCenter’s costs. Those are not loan origination costs. So there's no origination costs to this, but there are other people's fees that are going to be included in this process.
John Mason: And keep in mind that your escrow balance that you have on mortgage one is going to be refunded to you in 30 or 60 days, hopefully. So you're reloading escrow account two, you're getting refunded from escrow account one, the two are probably never going to be the same numbers. And if you're like me, I get a letter every year from my mortgage service provider that says your escrow account is short.
So we need a one-time payment or we need this or we need to true it up. Home insurance has gone up. Property taxes have gone up. Things are changing. So if you were to go through a refinance right now, you may have a little more out of pocket than normal just because prices have moved, insurance rates have gone up.
So maybe you're coming to closing with a little bit more than you thought, but that's because your current escrow account was even more behind than you thought. I think I even saw one time James on one of my refinances that XYZ mortgage provider, I think they charged me an account closeout fee or something.
Do I remember that? Is that true?
James Anderson: So if you're talking about a refi, sometimes, or a majority of the time, the bank that you're paying off has a release fee. Which is just a recording fee. It's a recording fee to do what's called, record the certificate of satisfaction to show that loan doesn't exist anymore.
So it basically removes the deed of trust or the lien that was paid off against the house. I think it's only like $41, $42, maybe $50 now. But yeah, that is through the payoff statement.
John Mason: So I guess summarizing here, CapCenter is not charging you any fees, their rates are competitive, there are going to be fees associated with your refinance, a few, and there's going to be out-of-pocket cost to reload your escrow account, which those aren't fees, but we do need to be ready that those are coming.
So many of our clients, Tommy and James, are in a position where, we work with folks who are in or near retirement. Typically 55 to 65 is when people come to see us. They have a million or more of investments. A lot of federal employees have paid off their first home. And now they're in this new transition period where maybe they're looking to move to a retirement community.
Maybe they're looking to downsize. Maybe a kid in Colorado just had three grandbabies and they want to be closer to the grandchildren. And I think one of the concerns that we hear from time to time is, “Should I go now? Should I purchase now? Should I buy this house now? Should I make this move now?”
And I think people are waiting for some magic time, some crystal ball moment where it's yes, absolutely. It makes sense for me to do this move now. And I just want to highlight why that's dangerous. And I'll caveat this with, if you need to move for your financial plan, meaning your current home is not satisfying you, we think that it's probably time for you to move, assuming you can afford to do that.
And here's why. One we don't have forever on this planet. We have a limited amount of time to enjoy our home, our family, our grandchildren. And if our current home isn't providing us what we need, it's time to make a change.
Assuming that it works in the context of your financial plan. Generally speaking, it feels like consumers have baked in this idea of when X happens, Y will certainly happen. So for instance, when the Fed cuts rates, the 30-year mortgage will drop. That's not always the case. How about for me? I thought as soon as interest rates rise, home values are going to come down.
We saw completely the opposite. Rates rose and homes rose faster. And it's daggone, like all of these things that we thought are always going to be true. So let me just paint the picture guys. We're waiting for the magic bullet. We're waiting for rates to drop. We still have a shortage of inventory.
Things just keep going up in price. Eggs are more expensive. Everything's more expensive. Are we really better off waiting for this magic time where homes have continued to appreciate at X percent and all their rates have dropped? The house you bought just went up a hundred grand. We lost time and we spent the same amount of money.
There's no way to know when the right time to make this move is. It's impossible.
James Anderson: Yeah, there's what's called the lock-in effect. Where people who have those 2% and 3% and even low 4% interest rates, they're not willing to move. As you said, low inventory is a result of that, which is what's all pushing prices up.
So rates go up, people don't create inventory. And then if you want to be a homeowner, you got to pay to be a homeowner. That's exactly what happened. It's still happening. And builders, we had touched on this very early in the podcast, but builders aren't always building to replace the supply that's or to produce the supply that's needed in the marketplace because of the interest rates, honestly, that's one factor is there's a survey called builder sentiment that comes out every month, and they're basically saying, “Okay, at high rates, we're not going to be able to sell out quickly,” and they always want to be able to, if they're going to build a neighborhood, have confidence to build out and sell that whole neighborhood quickly so they can get to the next project as well.
John Mason: Makes sense. Tommy, I think we probably want to start wrapping this up. Maybe we have some quick rapid-fire questions that we want to get into James or we can transition to action items, whichever you think is best.
Tommy Blackburn: I was thinking maybe moving towards the retiree scenario here.
We've given a lot of good information, but just walk through, “Hey, I'm a federal retiree or retiree in general. And I now want to go downsized, changed my home up.” Whatever the scenario is. So what does that look like? What does CapCenter need? And hopefully, maybe this is action item B.
Work with Mason because we walk you through this whole process and get it done quickly. But we get creative sometimes with how we help them get through this process and think at a high level.
James Anderson: Yeah, so by all means, someone that's retiring obviously is giving up a stream of income. And so when we are underwriting a file, obviously there's credit.
And then there's a downpayment on a purchase. But then it has to be what is your debt to income ratio? And debt-to-income ratio as far as income is concerned, obviously you have pay stubs, right? For someone who's working. But if they're not, then well, where are their streams of income coming from?
Social Security is one, but we don't always say to take Social Security at 62 or even 65. Sometimes it's best to wait till 70, whatever the right age is right now. Obviously, case by case scenario. Not everyone has a pension these days. Really, people have a million bucks, they have two million bucks.
What stream of income exists? If you don't have a distribution, then that stream of income just doesn't exist. So there is for both Fannie Mae and Freddie Mac. I don't believe this works for VA or FHA, but for most conventional products, we can actually do what maybe we'll call asset depletion or assets as income.
Fannie and Freddie's rules are a little bit different. Fannie basically requires that we take a retirement account. It has to be a retirement account and divide by the term. So if someone has 2 million in retirement, they're doing a 30-year loan. We take 2 million divided by 360. And we can use that income without them setting up a distribution.
They have to be able to qualify on that number. So that's where it becomes a little bit sticky sometimes. And then on Freddie, Freddie is actually a little bit nicer. And I'll say in both these scenarios, they're for primary residences, limited cash outs, purchases, and there is a down payment requirement of 20% for these scenarios.
You can't put down 5%. And Freddie Mac will actually allow you to use all assets. You can have a million dollars in stock and two million dollars in retirement as long as you're 62 years old. There's an age requirement with that one. And we can divide by 240. Even if it's a 30-year loan, we can divide those assets by 240 and that can be the income.
But if you're doing a 15-year loan, for Freddie, you still have to divide by 240 instead of 180, like you would with Frannie. I will say a lot of the loans I've done for your clients and for a lot of clients, we use the assets as income. Even if it's just to push us over the edge, where people do have Social Security, they do have pension, but their debt-to-income ratio is not quite there, they don't have a distribution.
Then we get their statement. It could have 500 grand in it and it could give us income of 600 a month. And that's the difference.
Tommy Blackburn: So that's the asset test, which is interesting. And I think, believe we've gotten creative even recently where it's, and I don't know of the different lender standards where it seems like it changes the test if we actually start a distribution from a retirement account versus…
James Anderson: So if someone can't qualify with that scenario, their path forward is to set up a distribution. The rule for us is that it has to be set up, they have to have received the first distribution, and what we have to do is calculate that the income at that level is likely to continue for three years.
Any of our incomes, we have to, either assume or verify that they're going to continue for three years. Someone taking out $90,000 a year. $7,500 a month. You gotta have about $300,000 to be able to qualify at $7,500 a month.
John Mason: It's just so silly. On one hand, it's we can qualify you if we divide it over 20 or 30 years.
And then it's if you actually take a distribution, we only need it to last for three. It's the same test. It's the same. It's like, how much money do you have? Can you pay your loan? In one instance, we need it to last for 20 years. In the other instance, we only need—some of this stuff will just never make sense.
James Anderson: I understand. I don't write the rule book. We just play within it.
Tommy Blackburn: Same thing as the tax code. We don't write the tax code. We have no idea why we can guess as to why things are a certain way. Sometimes it's logical. But like at the end of the day, it doesn't matter. Understand it and know how to plan around it.
And this is where I think, having an advisor in your corner who also has a relationship with a firm such as CapCenter is helpful because, and this is what we do a lot of times with our retiree clients, and it's probably easier for them because they have their federal pension, but we can turn on an income, know we're going to plan around this, and usually it's, “Hey, we're going to sell the other house.”
So once the other house sells, we're probably going to recast the mortgage or refinance it or pay it down. And we can turn this income stream off. So that's what I meant by being able to zoom out and look at something from 30,000 feet as the advisor versus almost like when you're working with your typical tax preparer.
They're just preparing a return, your typical It's not true of all, but many of your loan officers I would say, it's just, hey, here's like my standard procedures. Whereas if it's, if you can zoom out for a minute, you can think more creatively.
John Mason: No doubt. And, you think about how many houses people buy over their lifetime.
Sarah and I are maybe in our, “forever home.” I don't know how often, how many people buy houses. It's the interest rate. We're like 2.25. We ain't going anywhere, life's good. So how many homes are you going to buy? How many times have you been through the mortgage purchase scenario or the refi scenario?
Maybe you've only done it three or four times your whole life. Maybe we did it three or four times last week, right? So we have a saying at Mason & Associates, it's not uplifting. But it's you only live, retire, and die one time. We've done all of these things hundreds of times, if not thousands of times.
And that's the same with the refinance process, the purchase process. So a couple of quick hit items. Number one, don't be scared of PMI, especially if it's a short time as you're trying to get from home one to home two. PMI is not the worst thing in town. It's relatively affordable. CapCenter's website will give you a decent idea of what that looks like.
And then, oh, by the way, there's all sorts of rules on how PMI can fall off either automatically or you can submit an application for it to go away. And then if it wasn't abundantly clear audience, if you're a federal retiree, you will be able to qualify for a loan or a mortgage and retirement, your pension, your social security, the investments you've saved.
So we don't have to have a lot of pressure of doing this before your W2 changes to a 1099, meaning you go from working to retired. Like James was saying, you have income streams where most people don't. Is it easier to get qualified for a mortgage when you're working? Probably. But that doesn't mean we can't do it in retirement.
James, we're running out of time. Can you quickly explain to our audience maybe two quick things. If somebody has access to a VA loan, is that typically always the best scenario? And I'll caveat that with they have a 10% disability or higher, so they don't have a VA funding fee. So VA loan versus conventional, which one is typically better?
And also caveat, there's issues with the VA loan, like you can't do a recast and etc. But maybe just from a rate perspective. And then finally, FHA versus conventional. I imagine most of our clients, people listening to this podcast, would always be looking at conventional. But anytime I say the word always, I cringe.
So hit on those two items for us and then we'll go into any closing comments.
James Anderson: All right. I think your question is specific to the VA loans where people are exempt from the funding fee, they have that disability rating. The VA loan is going to be hands down the better option versus conventional if you are exempt from the funding fee.
In very rare times over my time here has the VA rate been higher than conventional rate. So the VA loan, yeah, absolutely recommend that over conventional 98% of the time.
John Mason: It seems to be that the VA almost always comes out on top in that scenario. We still encourage clients to look at both, but at least in my experience, and I'm sure yours too, it looks like VA typically is going to win in that scenario.
Tommy Blackburn: Agree. And it seems pretty unlikely from what we come across that you would have a less than 10% rating.
John Mason: Exactly. So most of our clients were seeing a 10% or higher disability rating. So VA is typically the way to go. It may be a little more complicated, folks, when you get down to refinancing a VA loan.
They have what's called an IRRL: the income or interest rate reduction loan. IRRL, and there are certain requirements for you to qualify for an IRRL. One of those, I think, is your loan has to be 7 months old for you to be able to do that, or you must have made at least 6 or 7 payments. So you may find yourself that with the IRRL loan versus refinancing on a conventional, there may be a slightly bigger time gap between your ability to refi on conventional versus doing the IRRL refinance opportunity.
Tommy, I think this was an awesome episode. We covered so much detail today. Any closing thoughts for our audience?
Tommy Blackburn: Yeah, it was an awesome episode. It's always a blast. And it was great to have James back after a couple of years to have our first returning guests, we believe.
That was really fun. Closing thoughts here. I think it goes back to the scenario where we said walking through the mortgage process. You don't know what you don't know. You don't do this all the time. My closing thought is working with an advisor can make this smoother, can zoom out to see the big picture, know the ways to make this efficiently done, and hopefully help you also see not only how to navigate this process, but how to navigate or think about in the concept of life.
Some of what we hit on John was what are you trying to accomplish out of life? Is this move more about a lifestyle, about seeing the grandkids, being somewhere? And let's make sure we keep that in the context and don't get too hung up on trying to get our timing perfect.
John Mason: Absolutely. My thought there, Tommy, as well, as we just got back from a mastermind trip or a study group trip where we saw many of our clients, or I'm sorry, not clients, but friends, financial planners who challenge us as people and challenge us as business owners.
And it was so rewarding to be around a group of like-minded individuals that could give us some opportunities to grow as people and business owners. And I think, obviously because I'm saying it, I think this, but generally speaking, finances are lonely. It's not something that we feel comfortable sharing with other people.
It's not something we feel comfortable asking other people's opinion. So I wrote down, “You need a village. You need people who can help you through these decisions that you only do once or twice in a lifetime because maybe you can't see clearly.” Our theme song that we played for a long time is, you can see clearly now just how you have won.
And sometimes it's so lonely when you're trying to go at this alone and you don't have anybody you can talk to. And one of the big advantages of working with a team of advisors like Mason & Associates or other qualified professionals is you get their perspective. You can share your concerns. You can share your guilt.
You can share whatever feelings you may have about your financial situation and it doesn't have to be so lonely, and you don't have to make these decisions in isolation. So the value of financial planning is so much more than “Can I retire? How is my investments doing?” Sometimes it's just about having somebody that you can lean on to challenge you to get out of your comfort zone, to push you to say, “Joe, Sally, you can afford that 6.5% mortgage and be closer to your grandkids now. Yes, we're going to stress your portfolio a little bit. But you can do it.”
How valuable is that advice? That's to be determined by each individual. Thank you for another wonderful episode of the Federal Employee Financial Planning Podcast. Thank you, Tommy. Thank you, James. Thank you, CapCenter.
And also, thank you, audience, for being here with us for almost three years now. We appreciate you very much. We're Mason & Associates. Masonllc.net.
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