Ford McNutt is the owner and mortgage consultant for Professional Choice Mortgage.
Ford McNutt is the owner and mortgage consultant for Professional Choice Mortgage. CDT photo

Ford McNutt became an independent mortgage broker 10 years ago, because he knew it would be best for his clients.

“I knew I could offer clients better rates and better options if I had my own company,” he said.

Some things have changed in the mortgaging industry since he got into it 23 years ago. People, he said, are more aware of their credit scores and more educated about the mortgaging industry due to the internet.

It doesn’t hurt, however, to learn a little more about an industry that has close to record low interest rates.

Q: How low are interest rates now?

A: They are near historical lows. We really saw the lows in April/May 2013. After that, rates spiked almost 1.5 percent in about a two-month period. While there were some ups and downs, they were flat until the end of January 2014. Since that time, we have seen a steady decline and we are probably within .25 percent of those all-time lows of 2013. As of the end of January, the 30-year fixed rates were approximately 3.5 to 3.75 percent and 15-year fixed rates were 2.75 to 3 percent.

Q: Why are interest rates so low?

A: Mortgage rates are tied directly to how mortgage-backed securities are trading.

Most people have heard of Freddie Mac and Fannie Mae. They buy the majority of mortgages in the country and issue securities that are collateralized by these mortgages. These securities are called mortgage-backed securities, and there is a market where these securities, which are essentially bonds, are traded. Performance of the mortgage-backed securities market dictates mortgage rates. Every day Freddie Mac and Fannie Mae set their price on the daily performances of this market. Banks or lenders then set their rates based on what Freddie Mac and Fannie Mae are willing to pay to purchase their loans.

Several years ago the Federal Reserve embarked on a program called quantitative easing, where it was buying billions and billions of dollars of mortgage-backed securities. This created an increased demand, which pushed the price of the securities higher and interest rates lower. In May 2013, the Fed hinted that it may pull back on its purchases, which caused the markets to overreact in fear, and that is when interest rates spiked because investors started selling mortgage-backed securities out of fear. The Federal Reserve did taper its purchases and ultimately wrapped up quantitative easing towards the end of 2014.

Once the Fed started to taper we saw rates improve over the last year. ... Since the economy is not on solid footing, more investors are looking towards bonds as a safe haven, which has kept the prices up and rates low.

Q: What are the benefits of refinancing?

A: The first is lowering your interest rate and saving that interest over time as well as benefiting from a lower payment. Some people also look to reduce the term of their mortgage and pay it off quicker. Finally, some people look to cash out some of their equity to consolidate debt, pay for college, pay for home improvements, et cetera.

Q: How does my credit score impact mortgage refinancing?

A: The higher the credit score, the better the interest rate. In general you need a credit score of 620 or higher for a mortgage, and a credit score of 740 or higher will get you the best rate. The difference between a credit score of 620 and 740 could be several thousand dollars or more.

Q: How much money can you save by refinancing?

A: It all depends on the difference between your new interest rate and your old interest rate, the amount of your mortgage and the closing costs. In addition, if you are able to lower the term on the mortgage, you will pay the loan off quicker and therefore save even more money.

Let’s assume that you are five years into a 30-year fixed rate mortgage at 5 percent and you owe $200,000. If you refinanced into a 25-year loan at 3.75 percent, you are saving 1.25 percent in interest or approximately $2,500 per year in the first couple of years. This savings will decline as the loan balance begins to decrease. If it cost you $2,500 to refinance, then you would break even in the first year and you would be saving money over the remaining life of the loan.

Q: How do you know that it’s cost effective to refinance?

A: A lot depends on how much you are saving from a reduced interest rate, what your loan balance is and how long you plan to keep the loan. A 1 percent savings in rate is going to be far greater on a $400,000 mortgage versus a $100,000 mortgage. Also a 1 percent savings is going to be greater on a 30-year loan versus a 15-year loan.

In general if you can recoup your closing costs in a year or two, it probably makes sense to refinance. Also, you can look at no-closing cost loans, in which you take a slightly higher interest rate and end up with no fees or very little fees. If you are doing a no-closing cost loan and are reducing your interest rate, then it makes sense.

Q: Most people go with a 30-year mortgage. There are several other options at 15, 20, 25 and 30 years. What are the advantages and disadvantages of the terms?

A: Usually by going with a lower term you are getting a lower rate. The payment will be higher because of the shorter term. Some people prefer to stay with a higher rate and a higher term for the flexibility of having a lower payment.

Q: What is a reverse mortgage it and why would someone do it?

A: I don’t handle reverse mortgages myself, but in general they are for people 62 and older. You are borrowing the equity in your home and can take cash out in a lump sum or monthly distributions. The benefit is no payments are due while the person is living in the home, but you are still accruing interest, which is added to the loan balance. There are limits and guidelines based on the person’s age and the value of the home.

Q: I’ve heard that mortgage debt is good debt. What is your opinion?

A: I think the main reason people say that mortgage debt is good debt is because the interest that you pay on a mortgage is tax deductible so you are getting a tax benefit. From a credit scoring perspective, mortgage debt is the best type of debt to have.

Q: How long do you foresee interest rates being low?

A: There are many factors that can affect this market. Typically the bond market and stock market have an inverse relationship, so if the stock market is doing well, then the bond market is down and interest rates are up and vice versa. There is a schedule of economic reports that are published monthly on inflation, unemployment, the economy, etc., and depending on what information is contained in these reports can influence the markets. There are also people of influence, such as Federal Reserve members, who make statements that can impact the markets, and international events can also have a bearing. I think even the drop in gas prices has had a positive impact on interest rates.

As long as the economy is not heating up too quickly, inflation is in check and people with influence are not making startling comments, rates should stay relatively low for the short term. Right now, most experts are again predicting 30-year fixed rates to be around 5 percent this time next year.