11/20/24 Home Buying 101: Mortgage Know-How and Acronyms to Live By

The Moneywise Radio Show and Podcast Wednesday, November 20th BE MONEYWISE. Moneywise Wealth Management I "The Moneywise Guys" podcast call: 661-847-1000 text in anytime: 661-396-1000 website: www. MoneywiseGuys.com facebook: Moneywise_Wealth_Management instagram: MoneywiseWealthManagement Guest: Allyn Medeiros, Sierra Pacific Mortgage website: https://lo.sierrapacificmortgage.com/allyn-medeiros?utm_source=GMB&utm_medium=Yext

• 0:00Speaker 00

  From the padded radio room off Stockdale Highway, here is Money Wise. Call or text in at 661-396-1000.

• 0:09Speaker 01

  I need a dollar, dollar, dollar, that's what I need. Hey, hey. Well, I need a dollar, dollar, dollar, that's what I need. Hey, hey. Said I need a dollar, dollar, dollar, that's what I need. And if I share with you my story, would you share your dollar with me?

• 0:29Speaker 02

  Securities offered through SEF Securities, Inc., member FINRA/SIPC. Investment advisory services offered through SEF Investment Advisors, Inc. SEF Securities, Inc. and Money Wise Wealth Management are independently owned and operated.

• 0:40Speaker 00

  Now, let's start the Money Wise Show.

• 0:42Speaker 03

  Welcome to the Money Wise Show. We are live from the padded radio room off Stockdale Highway on ESPN, Bakersfield, 1230 a.m., 101.1 FM, and always streaming at MoneyWiseGuys.com. You can call or text into the show 24 hours a day at 661-396-1000. I am Sharad Waite, and sitting here with me is?

• 1:03Speaker 04

  Dustin Weaver.

• 1:03Speaker 03

  Dustin Weaver, D-Dub.

• 1:06Speaker 04

  D-Dub.

• 1:06Speaker 03

  Happy Wednesday.

• 1:07Speaker 04

  Happy Wednesday to you. It's good to be here.

• 1:09Speaker 03

  It's great having you here. Here in a little bit, we're going to have Alan Maderos talking about interest rates, mortgage rates, lending, as usual. It's always fun to have Alan on. But before we do that, I want to talk about a message that we got and get right to a message. Again, thanks, listeners, for that. I'm going to read it, and then I want to talk to you, Dustin, about this. Says, "Hello, Money Wise. Curious to know, what is the 3-5-7 rule in trading? Is this something Money Wise uses, or some other rule that may be good to know when new to trading? Thank you, and we'll take your answer on the podcast. Thanks much." So Dustin, I love this. Great question.

• 1:53Speaker 03

  Asking about a trading rule, 3-5-7. I have to be honest, I had to look this up.

• 1:59Speaker 04

  You know, I did, too. I was not familiar.

• 2:01Speaker 03

  And I don't feel bad about it, because there are so many different trading... Gimmicks?

• 2:08Speaker 04

  Oh, yeah.

• 2:09Speaker 03

  I don't want to call it a gimmick, but trading ideas and concepts out there that, you know, there is just, there's so many of these. So if you're curious about what this is, the 3-5-7 rule, apparently what it means is you have 3%, you're setting limits on yourself for how much you can trade. 3-5-7, 3% is how much you risk per trade, 5 is no more than 5% total risk, and 7 is a weekly loss cap. So you have basically a 3% total of your value. So you have $100,000. You can't, you can't risk more than $3,000 in any individual stock.

• 2:53Speaker 04

  In one trade.

• 2:54Speaker 03

  And then you can't risk total more than 5% in one trade that you're trying to make. And then you are limiting your losses to 7%. Once you reach that 7% loss in any given week, you stop trading for the rest of the week. And then, I think the idea is that it's going to prevent some emotional decision-making or overtrading during a losing streak. So, I mean, right off the bat, my thoughts are, Dustin, is what, well, I see the utility in having a program and setting your limits and setting your losses when you're going into trading. That is beneficial. I think, and it's similar to, if you see any advertisements on TV now for DraftKings or any gambling.

• 3:38Speaker 04

  Oh, yeah.

• 3:39Speaker 03

  There's a, there's usually a disclaimer that they'll say at the end of the ad, which is, remember, you know, be responsible with your gambling. Do you remember what they, the suggestions they give, Stephen?

• 3:50Speaker 04

  Well, they, they mention all the states that it's not legal in, and then they say, if you have a gambling issue, call this.

• 3:55Speaker 03

  Yeah. And then there's another thing that says, remember to set your limits, don't, don't chase losses. There's a couple of other suggestions that they give to people, so that you just protect yourselves. So this is, this kind of reminds me of that. It's like a...

• 4:10Speaker 04

  Yeah, it's a guideline, right? For those that are interested in day trading, right? This is not your average, every, every, you know, average, everyday investor. This is somebody that's really getting in the weeds and doing their own trading at a granular level, right?

• 4:24Speaker 03

  Right. And what would you recommend to somebody that was looking at investing on their own and wanted to start? Like, what, what rules would you recommend? Or what would you say to them?

• 4:37Speaker 04

  Well, I hadn't seen this 357 before. It's certainly a metric to consider. But really, the way that I've always done it has been broad diversification. You know, really spreading out the risk across several different categories, not trying to anchor to any one company.

• 4:54Speaker 03

  Yeah, you know, part of this, I think what it, at MoneyWise, to be clear, we don't use trading techniques. We, we use a broad academic approach to investment in general. Investments and financial advising, financial planning. They all, there's, there's, you know, some guidelines that we use, but we, we, we stick to the concept, I believe what, you know, I've quoted many times over the years, a, a study by Brinson, Hood and Beebauer. It started in 1986, but it's been verified over and over again.

• 5:36Speaker 03

  And it's essentially a study that is determining a portfolio performance. And this study has been redone by Ibitson, is it Ibitson and Kaplan?

• 5:46Speaker 04

  Ibitson, yeah.

• 5:47Speaker 03

  Ibitson and Kaplan. That happened in 2000. There's another similar study that took place, Sharp in 1992. Callan and Associates did a study over 58 different large institutional portfolios in 2006. Essentially, the study is what makes a portfolio do what it does? How does a portfolio, why does an investment portfolio go up or down? And what are the determining factors? These studies essentially show that about 94% of the variance of a portfolio's preferred returns over time, again, 90-plus percent of a portfolio's return over time is asset allocation. Asset allocation is simply how, what kind of assets you have inside your portfolio?

• 6:31Speaker 03

  What are the asset classes you have? What percentage of those asset classes do you have? For example, real simple, bonds versus stocks.

• 6:38Speaker 04

  Right.

• 6:39Speaker 03

  What percentage of stocks do you have versus bonds?

• 6:42Speaker 04

  I would just add, within each of those categories, there are several different subcategories, right?

• 6:49Speaker 03

  Yeah.

• 6:50Speaker 04

  So we talk about stock, there's large company stocks, mid caps, small caps, international versus US, etc.

• 6:57Speaker 03

  Those, the mix of those asset classes are far more important than market timing or security selection, individual stocks. So when you're talking about a trading rule or a trading guideline, that's the guidelines that we stick to, is asset allocation, designing and working with professionals that manage and construct portfolios specifically based off of specific time horizons or and/or risk tolerances. So if you combine those things, it just increases your odds to have market type returns. And that's what we're looking for.

• 7:40Speaker 03

  We're not, yes, we can beat the market every once in a while, but you're not ever going to consistently beat the market. You also don't always want to consistently underperform the market. You want to have market type returns. And, and so, you know, that's, that's our philosophy is, is stick to the things that you can't control within your portfolio. You can control your fees, you can control taxation in many cases, certainly can control allocation and, and the risk.

• 8:11Speaker 04

  Right.

• 8:12Speaker 03

  And so.

• 8:13Speaker 04

  Have I talked to you about LEAPIT before?

• 8:14Speaker 03

  I don't know.

• 8:15Speaker 04

  LEAPIT.

• 8:16Speaker 03

  I like the sound of it.

• 8:17Speaker 04

  It's an acronym, it's an acronym that I've memorized here. So it stands for liquidity, experience, age, purpose, income, and taxes.

• 8:27Speaker 03

  Yeah.

• 8:28Speaker 04

  It's really those six variables that help us determine, okay, what asset allocation makes sense for me.

• 8:33Speaker 03

  Yes.

• 8:34Speaker 04

  There's a lot of moving parts within each, each one of those, but just kind of my own internal guideline when I'm meeting with somebody.

• 8:39Speaker 03

  Yeah, you don't think, usually what the general public is thinking about if they're interested in trading or investing is, you know, what you saw or what you thought you saw on TV or online 15, 10, 20 years ago, you know, you're, there's some, somebody's got some secret sauces picking these stocks and doing this great thing, or like that, that's a professional portfolio manager that is following a very... A very disciplined approach that is not, there's no reliance on heuristics at all. They're not, there's no gut feelings at all. It's very, in fact, when we hire money managers,

• 9:18Speaker 03

  we're looking at fund managers and not only are we looking at their, their performance that they have, have, have, but how long have they been doing it? And do they have a, an approach that they stick with? Because one of the big problems with mutual funds, for example, is style drift. Or, or money managers in general is this style drift that you generally get a money manager that's trying to chase returns or trying to keep up with some, something. And they'll, they'll move away from, let's say, being a, a large cap fund manager more towards a mid cap or a small cap because they, you know, for whatever reason, they're trying to get higher returns. It's like, well, look at your, your mandate and your, in your, in

• 10:02Speaker 03

  your investment policy statement is this. And, and so when you get this style drift, it's all of a sudden, it's like, no, when I want a large cap fund, I want it to be purely large cap. I don't want, you know, a style drift. And I also don't want security overlay because I've got another fund manager that is specifically managing the small company. So don't get into the small company area, right? So, you know, this is, this is an approach that we have at Money Wise, which is, you know, we, we remain agnostic as to who is managing it. We just want to make sure that the people, that the professionals managing and the trades happening within the accounts

• 10:41Speaker 03

  are following the, the, the stated policies and, and the, and, and using pure, purely academics, not some guess that has worked, potentially could work for five or 10 years. And then, you know, a new business cycle comes in and it doesn't work anymore.

• 11:02Speaker 04

  Exactly.

• 11:03Speaker 03

  So, I like, what's you call it?

• 11:05Speaker 04

  I was going to say, what's the six letter?

• 11:07Speaker 03

  Lip it?

• 11:08Speaker 04

  Leap it. So liquidity, how much access to this account do I need or this particular investment, right?

• 11:13Speaker 03

  Yeah.

• 11:13Speaker 04

  Experience, what is my previous and current experience with investing or, or buying this particular trade, right? What's my age? That tells us a time horizon, you know, the time between today and when I might need the money.

• 11:25Speaker 03

  Yeah.

• 11:25Speaker 04

  That's very important too, right? When investing. So, purpose, does this, you know?

• 11:32Speaker 04

  Particular bucket of money, have a certain goal in one, three, five, 10 years from now? What's the purpose? What am I going to use this for? And then what's my income, other sources of income? What's my tax bracket? You know, because the taxes matter too with investments.

• 11:45Speaker 03

  Right.

• 11:45Speaker 04

  And there's different taxation of different types of investments.

• 11:48Speaker 03

  Right.

• 11:49Speaker 04

  The more you get into it, the more you realize, wow, this is complicated stuff. Maybe I need some help with this.

• 11:54Speaker 03

  Exactly. And you want to make sure you have somebody that's monitoring it consistently for you and keeping you out of trouble.

• 12:01Speaker 04

  I'm going to make shirts of those.

• 12:04Speaker 03

  I'd wear it. That's great. Great question. Thank you again for that. 661-396-1000 is the number. And I think that was a really great discussion. We're going to take our first break. We come back, Alan Maderos is joining us. We're going to talk about lending and what's going on in the interest rate market. We're Money Wise, we'll be right back.

• 12:23Speaker 00

  Are you nearing retirement and currently working with a financial advisor? Are you not sure if you're invested appropriately? Call our offices at 661-847-1000 to sit down with a Money Wise financial advisor for a no obligation assessment of your investments.

• 12:44Speaker 03

  Thanks for tuning in. Welcome to Money Wise Show. I'm Sharad Waite here with Dustin Weaver. We have our guest, Alan Maderos from Agape Mortgage. Alan, welcome to the show. Welcome back to the show.

• 12:53Speaker 05

  Thank you for having me.

• 12:55Speaker 03

  We love having you on, talking about real estate market, interest rate lending market. And so let's get right to it with interest rates. What's going on? Where are rates currently?

• 13:07Speaker 05

  So, right now, most 30-year rates are going to be just under 7%. They were actually doing pretty well up until October 3rd. October 3rd, there was signs in the market where there was a projection the Republicans would win in the election. And the market on the news made a drastic move and we lost a lot of value in the mortgage-backed securities, so rates went up.

• 13:30Speaker 03

  Yeah.

• 13:30Speaker 05

  So rates went up about 3/4%. So they're around 6.1, 6.2. Some days you can get it 5875 and it's jumped as high as 6875 to 7% right now.

• 13:43Speaker 03

  Yeah, this is a hard concept for...

• 13:46Speaker 03

  To understand, actually, you think, what, okay, the markets, the stock market does well. Money goes into the stock market, sometimes it leaves the bond market. That's not good for bonds, then what you see is you see bond yields go affected by the fact that money is moving away from bonds.

• 14:06Speaker 05

  I kind of akin it to, do you remember those squishy heads that you would use for like, I don't know, I saw-

• 14:12Speaker 03

  Stress relief?

• 14:13Speaker 05

  Yes, you know, you're like, you squeeze the head and then the ear pops out. I think that the, the financial system has a very similar concept, you know, that if you were to contain all the money, it's going to move from one investment to another. One that's going to be higher risk, one that has maybe a better return, one that's a lower risk. So the safe haven bonds and treasuries are typically where they park money when there's some volatility or concerns. But there was just this, this big push and money moved out of the bond market into the stocks.

• 14:47Speaker 03

  Bond prices go down, interest rates go up, or the, the rate on the bond goes up, so you have-

• 14:52Speaker 05

  Which is totally counterintuitive because we just had another quarter percent reduction, the Fed funds rate, right? So everyone thinks that the Fed funds rate is what drives mortgage rates, it does not. It has an indirect relationship because it basically is an indicator that inflation might be coming down, which is bond friendly, but it's going to take time, right? So, one of the things that's always been interesting to me is these revisions that we see on these labor reports. So initially you might get ADP that says this is the, the employment report, or you're going to get your inflation reports like CPI. And later on, when the revisions happen, that's when you see adjustments in the market. But there's always this knee jerk reaction.

• 15:35Speaker 05

  And we're just seeing right now, stability of the markets in the mortgage side, it's slowly starting to flatten and it should start coming down, but it's, it's very, very hard to tell right now because we're still in this- Uncertain timeframe with regards to how the stable markets are for even stocks. What do you, what do you guys see on the stock side? Have you seen, there was-

• 16:01Speaker 03

  There's a Trump trade happening, that's what it appears to be, which is a perception of, of where the economy will be.

• 16:10Speaker 05

  It's the news, right? So that's what I was talking about. So October 3rd was movement on news and projections.

• 16:16Speaker 03

  Yeah.

• 16:17Speaker 05

  Not necessarily actual numbers quite yet.

• 16:19Speaker 03

  The stock market essentially comes down to fundamentals at some point. And so you see some overpricing and then undervaluing and back and forth and like that. The bond market is so much more complicated, at least for me to wrap my head around. It seems so much more unpredictable.

• 16:35Speaker 05

  Yep.

• 16:36Speaker 03

  Because it's not only subject to the equity markets, the stock market, you know, the cash flow that comes in and out of the stock market. It's susceptible to interest rate, the interest rate environment, which is controlled first, the Fed, you know, sets that baseline. But you said that's just a baseline. It doesn't have a direct impact immediately on mortgage rates. And then mortgage rates also are subject, well, investor, consumers are subject to not just the, the interest rate, but also the price of the homes that they're trying to borrow.

• 17:11Speaker 05

  Yep.

• 17:12Speaker 03

  They're getting hit double whammy because there's lower inventory, higher prices continue to go up, and we still have elevated interest rates, right?

• 17:22Speaker 05

  Yeah, very true. So what we are right now in the slow season, so generally from October through the end of January is considered the buying season for those that want to get good deals.

• 17:32Speaker 03

  Yeah.

• 17:32Speaker 05

  Right? But it's all triggered by the fact that people start shifting their spending habits. Overall, right now, we've seen inventory building in Kern County. So I believe we're just around 1,000 units and we have been hovering in the 680 to 700 unit range.

• 17:48Speaker 03

  Wow. Yeah, that's a, that's an increase.

• 17:50Speaker 04

  It's a material increase.

• 17:51Speaker 05

  It is. Yeah, so the more balanced market would be a three-month supplier grader, which was going to be somewhere around the 1,200 to 1,800 unit range. So we're not quite there. Housing pricing has been fairly stable. We're not seeing a dramatic reduction in value. We are seeing more concessions, meaning sellers willing to give credits. But you sell the price at a cost and the credits are applied, but that's not necessarily the way it's reported, meaning-

• 18:24Speaker 03

  What do you mean, cost in credits?

• 18:26Speaker 05

  So let's just say that the list price is $400,000. It sells at $400,000, but the seller is crediting the buyer $10,000.

• 18:33Speaker 03

  Oh, oh, I see.

• 18:34Speaker 05

  But the recorded sales price is still $400,000.

• 18:38Speaker 03

  It's not counting, it's not counting what, down, not down payment, I guess, or extra?

• 18:43Speaker 04

  Like a rebate, you know?

• 18:44Speaker 05

  Well, it basically is this. It's in a situation, if you think of the big picture, it's maintaining price stability for the housing price, but it's allowing buyers to still get in with less money out of pocket. So when you start seeing both happening, price reduction and concessions is when you start seeing more of a depreciating market.

• 19:07Speaker 03

  Ah, right. Yeah, and we're not there yet. It's a decelerating market.

• 19:12Speaker 05

  Exactly right. The deceleration versus a depreciation, two separate things altogether.

• 19:17Speaker 03

  Yes, and also I've been shocked at the, the difference between new construction and existing home. I don't know what historically that difference has been, but currently it's pretty substantial. If you look at the median home price of existing home versus new home, it's like 80,000, I want to say?

• 19:36Speaker 05

  Yeah.

• 19:36Speaker 03

  Something like that? Is that correct?

• 19:37Speaker 04

  Are you saying it's 80,000 more?

• 19:39Speaker 03

  More for new.

• 19:40Speaker 05

  Which is, which is interesting, but it also makes sense because they're incentivizing buyers. It's very, very common right now to have anywhere between $10,000 to $20,000 in seller credits from builders.

• 19:54Speaker 03

  And their builders are, that are involved in the mortgage lending game, basically, that can offer incentives to easier entrance, maybe, for some-

• 20:04Speaker 05

  Which is, it's a good pathway, and anytime I have a client that the builder is not willing to give that concession, I, I say, "Go, go. It's, it's free money. You, you can't turn that away."

• 20:15Speaker 03

  Yeah.

• 20:16Speaker 05

  It's just unfortunate because the inventory that's out there for new builds will depend based off the area, the builder, and what has already been started or where the projection finishes are for these particular units.

• 20:30Speaker 03

  Well, it's a tough math, though, because you're paying, let's say, on average, $80,000 more for that new house, but you're getting more favorable financing, you know? I don't know at the end of the day, does that pencil out? Like, are you saving $80,000 because of that favorable financing that you're getting?

• 20:49Speaker 05

  I would say it depends.

• 20:50Speaker 03

  Yeah.

• 20:50Speaker 05

  Right? It's case specific, but looking at what's available, if you have an idea of what you want, you're always going to be enamored with that walk-through of a beautifully, you know, laid-out home that has been professionally decorated.

• 21:06Speaker 03

  Oh, yeah.

• 21:06Speaker 05

  But they don't have window coverings, they typically don't have backyards. That's an upgrade, that's an upgrade. That right there is definitely an upgrade, you know, kind of a thing. So, when you start really adding these things together, even a new buyer, and this is a telltale sign of a development that has over-incentivized buyers, is when you go look at this neighborhood after a tract has been completed, five years later, and you see that the yards are overgrown, you see the window coverings still have those, you know, temporary shades, you see that the development in and of itself, yes, they're newer construction, but the maintenance may not be there. Have you ever experienced this or seen what we're talking about?

• 21:51Speaker 03

  Yes.

• 21:52Speaker 05

  So, you wind up realizing that the buyers that bought those homes generally just barely got in. I mean, they qualified, but they didn't have any additional, let's just call it, spread or reserves to be able to do the things they really wanted to do to the home.

• 22:08Speaker 03

  It's almost first-home buyer. A lot of them are first-home buyers or entry homes.

• 22:14Speaker 05

  Correct.

• 22:14Speaker 03

  Even though it's still a lot or both. Yeah, but I could see where you could maybe get a concentrated, more concentrated group of... People who are ju- just barely made it in financially into that home. And yeah, you're right, it takes, you have so much money that you have to put in that house for five years.

• 22:32Speaker 05

  Yeah, there's just, there's just less margin, if you will, to do the things you normally want to do. So, there is a, I think, a dramatic difference from somebody who's selling a property, taking that equity, paying off some debt, and entering the new purchase with less debt and more down.

• 22:48Speaker 03

  Yeah.

• 22:49Speaker 05

  That's an ideal situation. So, somebody asked me one time, "So, why is the purpose, why should I put money down?" I said, "You're buying an equity position." That's what a down payment is. You're buying a future equity position in hopes that the market stays stable, and that the value of the dollars you put in will have a return when you go to sell that property. Right? If you put nothing down, then you're technically upside down initially, because of the cost factors that you, you know, had to incur to get into the residence. It may take a year, two years to recover that cost. But if you stay in a property long enough, or the property you purchased, you got at a good price.

• 23:29Speaker 03

  Yeah.

• 23:30Speaker 05

  Then you may have more equity in the future. But a down payment is essentially you buying equity.

• 23:35Speaker 04

  So with that, Alan, with what you just said, do you have a rule of thumb or a guideline? If someone reaches out to you, they're a renter that's thinking about buying, what kind of timeframe would you anticipate staying in a home to justify buying and getting off the fence?

• 23:50Speaker 05

  General rule of thumb is two years as a minimum, for capital gains reasons, right? And establishing yourself at a price point financially. So, most people recognize, but they don't really put dollars to paper. And what I mean by that is, is that, let's just say, somebody buys a house, and their high debt ratios are there, they just got a promotion, but they don't know what the dollars coming in are going to be after tax. Right, so you have additional expenses as an owner. You're going to have maintenance, you're going to have utilities, you're going to have the buck stops with you kind of a situation, plus your mortgage. And the inflation expenses that we've experienced, not only in rate,

• 24:33Speaker 05

  but we've also seen cost of insurance going up. So that's independent of your mortgage principal and interest payment, right? But it is a factor. So the two years gives you a good, I would say, a rhythm of knowing that you can make those payments comfortably. And at that point, if you're able to make it at two years, you're going to be able to sell that house and move on to the next property. Or if you hadn't refinanced, you know, be in a position where now you can take advantage of better market conditions if the market allows for it.

• 25:03Speaker 03

  Here, you have to be careful because under normal circumstances, after two years, almost everybody won't be upside down in their home on a normal market. But if you go back to the great financial crisis, which wasn't that long ago.

• 25:18Speaker 05

  Sure, sure.

• 25:19Speaker 03

  It took Bakersfield, it took us almost 10 years for some of these homes to recover from the hit that they took. So that means somebody, and we knew this, a lot of people had to walk away from their homes or they did short sales or they foreclosed because they had to move and they didn't have any equity and then we were in a down market. So, you know, you want to be, you want to be a little careful. I've always said two to, I've always said two to five years.

• 25:43Speaker 05

  That's why I said two is the minimum.

• 25:44Speaker 03

  Yeah.

• 25:45Speaker 05

  That's the point that I'm trying to make is that if your plan is less than two years to stay in that, I wouldn't do it.

• 25:51Speaker 03

  Yeah. It is though, one of the most, I've seen, probably the most widely common financial decisions that people make that gives them financial security. And maybe even outside of their 401K.

• 26:09Speaker 04

  Homeownership.

• 26:09Speaker 03

  Homeownership.

• 26:10Speaker 04

  Just in general, yeah.

• 26:11Speaker 03

  It's almost like the piggy bank. It is, it is there, it is the most common piggy bank that we have in society, probably outside of, even before retirement accounts, because it forces people to put at least some towards equity every month. In the beginning, it's just a little bit. Most of it's going to interest.

• 26:31Speaker 04

  Right.

• 26:32Speaker 03

  But you're putting a little bit every month. So if you have homeownership, you're forced into saving every month, every time you make that payment. And then you're just crossing your fingers that we keep at least the national averages of homeownership, which has been just above inflation rates. Residents, home residents, prices over the last 100 years have roughly been 3.5% increase every year on average nationally. So that's a, you know, okay, so you've got a good thing going for you there. You just don't want to, it's that first few years that can be super stressful. So we've got a couple of questions that we're going to get to after this break. We're going to answer some of these questions, but essentially I want to keep talking about

• 27:15Speaker 03

  the idea of what it takes for people to get into a home. This question in particular is asking about what programs might be available in California to help people with down payments or with lowering interest rates. So I want to get some ideas from you. Alan Maderos, you're our specialist and our guest today on Money Wise. I'm Sherrod and that's Dustin. We're going to be back after a quick break.

• 27:37Speaker 00

  Have you been putting off your finances? Seize the day. Call the Money Wise office at 661-847-1000 or email [email protected] for more information on how our financial advisors can help your financial situation.

• 28:01Speaker 03

  Thanks for tuning in. We're Money Wise. Welcome back to the show. I'm Sherrod here with Dustin Weaver.

• 28:05Speaker 04

  Welcome back.

• 28:06Speaker 03

  We're joined by Alan Maderos from Acapi Mortgage for talking about lending and borrowing for homes. And there's, it's just a fascinating time, Alan. Thanks for being on the show. Fascinating time in the world with interest rates and lending. We're essentially, if I, if I'm correct, we're at essentially a 50-year average.

• 28:28Speaker 03

  For our interest rate right now.

• 28:30Speaker 05

  Accurate, accurate for sure.

• 28:31Speaker 03

  It doesn't feel like it.

• 28:32Speaker 05

  No.

• 28:33Speaker 03

  Because people are still injured from.

• 28:35Speaker 05

  I remember when gas was $2.99. I mean, can you just bring that back? That might actually make me really happy.

• 28:42Speaker 03

  We anchor to these rates and there are so many people out there that are sitting on these 3% mortgages. 3.5% mortgages. They're just beautiful. I love those loans. There were so many times we got calls on the show. People say, should I refinance? Should I refinance? No. Not refinance, but should I? Yeah, refinance, get a different rate? Or should I pay off my mortgage? No, don't pay off that mortgage. And they're thanking us for it now. But we're in a different place now because now you're looking at close to a 7% interest rate. So you're looking at, you know, the national average there that's up there where you want to be very careful about, you know, what you're borrowing and how you're doing it.

• 29:26Speaker 04

  Yeah, you compare it to recent years. You know, it feels high, but like you said, go back 50 years, it's lower than many years too.

• 29:33Speaker 03

  Yeah, yeah.

• 29:35Speaker 04

  They were 13% at one time.

• 29:36Speaker 03

  Yeah, yeah. People still remember that. So here's a message for you, Alan. It says, "Great guest. Does he have any advice for buyers in California worried about high rates and rising home prices?"

• 29:49Speaker 05

  Buyers?

• 29:50Speaker 03

  Yeah.

• 29:51Speaker 05

  Get in if you can sooner than later. Unfortunately, you're not going to have enough pull as an individual consumer, nor me as an individual loan officer, to move the market. So affordability is an important factor. So if you qualify for financing and you're able to find a home, buy the home.

• 30:09Speaker 03

  Yeah.

• 30:09Speaker 05

  That's just my personal opinion because it's time in the market, not timing the market. That's very, very important about real estate, especially if it's your principal residence. There's totally different, you know, matrix you need to work off if you're an investor buying property and you're looking at cash flow analysis and other factors. But if you're going to live in that property as your primary residence. As soon as you can afford, purchase.

• 30:32Speaker 03

  Yeah, so if you're, again, listener, thanks for that message. You're in California and you're worried about rates and prices. What can you do? Ignore where you are. Buy the home when you can buy the home, which is when you can afford it.

• 30:47Speaker 05

  And it doesn't necessarily need to be a retirement home, right? So if you're a first time home buyer, have not owned a home in the last three to five years, get yourself back into the market because here's the long-term benefit. That property in and of itself does two things for you. Number one, it houses you and those that you love. And two, you're going to be paying someone for housing somewhere. Unless you're super fortunate, live with your family at the age of 35 or 40, which, and you don't pay anything except for groceries. You know what? That's just not as common. But at the end of the day, the sooner you can get in, the better. Now, what we have seen most consumers do is if they're able to get into the residence

• 31:32Speaker 05

  and they're able to comfortably make the payment, or make the payment even if it's a stretch, but make the sacrifice, it allows them an opportunity to take advantage of long-term growth or equity.

• 31:41Speaker 03

  Yeah.

• 31:42Speaker 05

  That's it.

• 31:42Speaker 03

  You're just, you're buying, like we were saying before, it's a little piggy bank. Every month you're putting in some equity and maybe you even get to deduct that interest rate if you're itemizing your taxes.

• 31:52Speaker 05

  You don't have to have a lot of itemization right now.

• 31:54Speaker 03

  I know.

• 31:55Speaker 05

  But you know, but if you can, for sure. I, we, there was a time when that was something that was promoted. You know, buy a house because you can write off the interest. No, with the standard deduction being as high as it is right now, it's not always feasible. So I would advise clients, you know, talk to a tax professional if you have those types of questions. But you shouldn't buy the house for that purpose.

• 32:13Speaker 03

  Another listener question here for you, Alan. It says, are home loans easier than they were a few years ago?

• 32:19Speaker 05

  They're about the same. I don't think there's anything that's really been different since Dodd-Frank went into effect in 2010. Ultimately, we qualify you based off of your current credit, income and assets. They're looking at debt ratios. They're looking at credit history to see if you've had any defaults or any negative history in the last 12 to 24 months. Certain loans are more flexible in those guidelines, very specifically FHA and VA. But getting a home loan, once you do the pre-approval, it's not that difficult.

• 32:47Speaker 03

  Yeah.

• 32:47Speaker 05

  Honestly, that's why it's best to go. Into a situation without duress, meaning you're not, you've not found a house, now you're going to try to turn it around and find out how to finance it.

• 32:57Speaker 03

  Exactly.

• 32:58Speaker 05

  Do the pre-approval first.

• 32:59Speaker 03

  Find out what that's going to look like.

• 33:01Speaker 05

  Then you know your numbers and you can go into the marketplace going, okay, I can afford this, I know the numbers, I can execute on it. Then all you're really worried about is the subject property, does it pass inspection? Are there any issues with the property, does it appraise? You know, that's what we're looking at as a lender, once the pre-approval is completed.

• 33:16Speaker 03

  I've been a fan of putting as little down as possible on loans because of, I like using cash for other things. Like, why am I putting it down on this? If it's a favorable loan, then just ride the loan out. Obviously, if it's a high interest rate loan, or there's other things, but, you know, I'm not a big fan of putting a bunch of money down on a loan. Is, is, is the struggle for most people getting into a home, the down payment?

• 33:44Speaker 05

  Yeah, it's generally the cash to close.

• 33:46Speaker 03

  It's the, it's not the, it's not their monthly budget or their monthly income.

• 33:50Speaker 05

  No, so if you were to compare apples to apples, if you had somebody that's renting a property, and they had to come up with first month last month, and they're renting for $2,500, just throw out that number, right?

• 33:59Speaker 03

  Yeah.

• 33:59Speaker 05

  At minimum, they have $5,000 just to get into that residence, as a rental.

• 34:04Speaker 03

  Right.

• 34:05Speaker 05

  Right? So, when you're purchasing, if you're a first-time homebuyer, the minimum down is 3% for conventional, 3.5% for FHA, 0 if you're a veteran. Now, in those situations, there are programs that will allow you to finance the 3% or 3.5%. But you're basically financing 100% at that point.

• 34:27Speaker 03

  Yeah.

• 34:28Speaker 05

  But that doesn't mean you're void of costs, you're still going to have closing cost expense. So, I generally tell people, around 3% to 4% of the sales price is what you're going to have to have available for additional closing cost expense.

• 34:41Speaker 03

  Yeah, like appraisals.

• 34:43Speaker 05

  Appraisal, escrow, title, prorations for taxes and insurance, any additional inspections, home warranty, it's all things that are one-time expenses.

• 34:53Speaker 03

  So on a $400,000 house, you're looking at

• 34:58Speaker 05

  12,000

• 34:59Speaker 03

  12 to $20,000

• 35:01Speaker 05

  Yes.

• 35:02Speaker 03

  That, that

• 35:02Speaker 05

  In closing

• 35:03Speaker 03

  In closing costs, not down payment, just pure closing costs. Yeah, so now I, yeah, I can see how that's becoming

• 35:10Speaker 05

  It's expensive.

• 35:11Speaker 03

  Yeah, it's, that is expensive.

• 35:14Speaker 05

  Now, here's the difference. In a market right now, as I was telling you, between October and the end of January, sellers that are in a situation where they've had the property on the market, the market yielded buyers, buyer came in and they canceled. This has happened. Failed escrows are at a higher instance than we've seen in the past. But the appraisal's already been done. The property's already had its inspections completed. The seller is motivated to sell. If a buyer comes in and they can qualify, they may be also incentivized to give them closing cost credits to close it out, to get it done.

• 35:48Speaker 03

  Yeah.

• 35:48Speaker 05

  Right? So especially if the property's vacant, or they already have a contingency to buy something else, which is another big emotional heartache, because if you really think about it, people are physically being moved, their families uprooted. Just sitting at our table, the three of us, if I asked each one of you, would you guys be ready to move in 30 days?

• 36:11Speaker 03

  No.

• 36:12Speaker 05

  No. I've got too much stuff.

• 36:14Speaker 03

  Yeah.

• 36:14Speaker 05

  I've got no way of really feeling comfortable planning because I still have a life. I've got to work, I've got to, you know? So this is the normal, everyday thing for these families. And when you delay an escrow, or you try to, it changes the whole planning for these people.

• 36:31Speaker 03

  And when, and then you have a lot of people who, if they do, are moving, they're doing it with a contingency of selling their

• 36:39Speaker 05

  Correct. And sometimes they're on hold. They're like, hey, if my house hasn't sold, or it's not in a position where they've removed their contingencies, I don't even want to pack a box.

• 36:47Speaker 03

  Right.

• 36:48Speaker 05

  So you can see, there's a lot going on here, and it's emotional. This is not just a transaction. These are people's lives.

• 36:56Speaker 03

  We're joined by Al Maderos again. I'm Sharad Waite here with Dustin Weaver. We're talking about buying homes and lending. There, when do you predict interest rates to get back down to 5%? How might that happen?

• 37:09Speaker 05

  The Nostradamus, uh, no, we've read, we've read a lot of commentary that's saying second half of 2025.

• 37:18Speaker 05

  Now, oh, you got.

• 37:19Speaker 03

  Yeah, here's the magic.

• 37:20Speaker 05

  What does the magic eight ball say?

• 37:22Speaker 04

  I'm waiting for Stephen to create a little.

• 37:23Speaker 03

  Yes, definitely.

• 37:24Speaker 05

  Yes, definitely. So there's an article that's here that basically is stating that they're expecting second half of 2025 for rates to drop into the fives again. I can tell you the market intensity and movement will really accelerate if you drop consistently below 6%. There's a sweet spot, I believe, in that five and a half range. And if it gets lower, more power to us.

• 37:50Speaker 04

  Yeah, and that's with current pricing, just.

• 37:52Speaker 05

  Correct, with current pricing. So people say, well, I'm just waiting until the rates drop. Okay, great. Everyone else is as well. So what's going to happen is if rates drop significantly or rapidly, you're going to have a run on the market. It's not toilet paper, but people are going to try to get in where they felt like they missed out.

• 38:10Speaker 03

  And they're still waiting. Let's say you wait six months or you're waiting six months of appreciation too. So you have appreciation working against you. The value's going up while you're waiting for the rates to go down. Are you really winning?

• 38:22Speaker 04

  I feel like there's always something to wait for. Did you hear people saying, oh, I'm going to wait till after the election?

• 38:26Speaker 03

  Yeah. Right.

• 38:28Speaker 05

  Yeah, no, and here's the other thing too. And if you really think about

• 38:32Speaker 05

  how buying happens, it's sell and buy when you need to. It doesn't matter if it's an up down market, it's always going to happen. So if there's a life event, that's going to motivate a sale.

• 38:44Speaker 03

  Yeah.

• 38:45Speaker 05

  I've had three relocations in the last 90 days, and those are not personal choices.

• 38:51Speaker 03

  Job change.

• 38:52Speaker 05

  So they had to move. But the buyers were motivated to buy. The seller was motivated to sell because they had to be someplace else, right?

• 39:00Speaker 03

  Yeah.

• 39:01Speaker 05

  So again, different life events sometimes drive the need to buy or sell. Now, as far as interest rates go, nobody likes where they're at. Let's be perfectly honest. If I could tell you. This day and this time, the rate is 2% fixed 30-year. Come on by my office. Do you not think that I would have a line out the door down the street?

• 39:22Speaker 04

  Mm-hmm. Can I buy a few rentals?

• 39:24Speaker 05

  Yeah, because, but I don't have that luxury. Nor do any of the advisors in this office to say, "This is the time and where you need to invest all of your money because we can see this running through the roof." Now, there's some unscrupulous people that may advise stupid things like that, but there's no fundamentals in it and there's no planning behind it and there's no risk tolerance review. So, what is the phrase? Be wise? What is it?

• 39:53Speaker 04

  Oh, be smart.

• 39:54Speaker 05

  Be smart, be safe, be money wise. And I mean, it's in the name.

• 39:58Speaker 03

  Yes, be money wise. We're going to take our final break, Alan. When we come back, we have a couple of listener questions. One asking about using AI in mortgage lending and buying a home. This comes up because yesterday we had Duffield CPA, John Duffield, on and we were talking. We had a listener question about AI and taxes and using that. So, when we come back, talk to us about if you use AI or if AI can be used in lending or in mortgages. And then another question about mortgage rates and the Fed. Like, how come the Fed lowers rates and we're not seeing it? We're going to cover that when we come back.

• 40:32Speaker 00

  If you're a business owner who provides a retirement plan for your employees, contact Money Wise Wealth Management to see if you're maximizing your options and minimizing your liabilities. Money Wise 401K plans are customized to you and your company's needs. 661-847-1000. That's 661-847-1000.

• 40:59Speaker 03

  Thanks so much for tuning in. We're Money Wise. Appreciate all the comments and questions. You can send, you can send a question 24/7. We will get to it whenever we can. 661-396-1000. Dustin, we got a question. Go for it.

• 41:14Speaker 04

  Oh, which one?

• 41:15Speaker 03

  Uh, about the catch-up.

• 41:18Speaker 04

  Yes.

• 41:18Speaker 03

  Catch-up provision?

• 41:19Speaker 04

  So, it says, I'm sure you haven't answered this one yet, but how can people near retirement use the new super catch-up limits to boost their savings?

• 41:28Speaker 03

  Yeah, so what is that? Explain the super catch-up.

• 41:30Speaker 04

  Yeah, the super catch-up applies to folks that are between the ages of 60 and 63 only. So, beginning in 2025, so next year, there's an additional catch-up amount that you can add. And not, not catch-up like, you know, mustard and ketchup.

• 41:48Speaker 03

  Aww.

• 41:49Speaker 04

  So, what we're talking about here, what this listener's talking about, great question, by the way.

• 41:54Speaker 03

  Yeah.

• 41:54Speaker 04

  Uh, with retirement plans at work, think your 401K, 403B, 457 deferred comp, thrift savings plans, the work-sponsored plans. Normally, there is a cap on how much you can put. So, you know, workers under age 50 can do $23,500 next year. If you are between the ages of 50 and 59, or over 64, you can do an additional catch-up, and that brings you up to $31,000. And they're basically saying, hey, we understand sometimes you need to catch up on your retirement savings in those later years, you know? Oftentimes, kids are up and out of the house, you know? Expenses might be down a little bit, uh, income could be peak earning years.

• 42:38Speaker 04

  You know, you're earning a little bit more money, want to save some more. Now, there's a super catch-up that says, hey, between the ages of 60 and 63, there's even more money you can save. So, instead of that $31,000 limit, it bumps up to $34,750. So, an additional $3,750. But it's only between the ages of 60 and 63, so.

• 43:01Speaker 03

  Just a little bump there.

• 43:03Speaker 04

  As long as you reach that age by the end of that particular year.

• 43:07Speaker 03

  Then you're then you're eligible to do that.

• 43:09Speaker 04

  Eligible. That's right.

• 43:10Speaker 03

  That was my question. I'm turning 50 next year. So I all year long, I am eligible for that first catch up.

• 43:17Speaker 04

  The first one. That's right. So you could do 31,000.

• 43:20Speaker 03

  31,000. But one of the perks of getting old.

• 43:22Speaker 04

  Yep.

• 43:23Speaker 03

  And get to save a little bit more towards retirement.

• 43:25Speaker 04

  And why they do it just those three years is beyond me, but that's what it is.

• 43:28Speaker 03

  It's so quirky.

• 43:29Speaker 04

  The rules, we just play by them, right?

• 43:30Speaker 03

  Yeah, it's quirky, but congratulations. If you're 60, 63 and you're behind on retirement, even if not, it's a great tool because you can save it towards a Roth. Like it can go to your Roth 401k or percentage or whatever it is, you know, it's a great. Use all those catch up provisions if you can.

• 43:45Speaker 04

  You know, that same listener sent in a follow up and says, okay, what options do does that person have if their employer does not offer the super catch up? So the way I understand it is because it's an IRS regulation, the plan should allow for that.

• 44:00Speaker 03

  Yeah, it's not an employer option. Like employer has to abide by that rule.

• 44:05Speaker 04

  Yeah, it's a limit set by the IRS.

• 44:06Speaker 05

  So so here's your question. A lot of times you do open enrollment and it tells you what your contributions would be based off of your requested amount. Would be that the time that you would make that acknowledgement? Or would you just continue to contribute? Because employers basically will stop based off their payroll systems on automatic hard stops. Unless they're notified, I'm assuming.

• 44:30Speaker 03

  You have to just, you have to, it's, you set that. You let your HR, your payroll know, I want to max out my contribution. And I'm now over 60, so I can put in the extra amount. So you just would have to give them those instructions and and make that happen. There's some new rules coming into play that are based off of Nobel Prize winner Thaler. I can't remember his first name, but it's essentially that the guy wrote the book about nudging, where it's getting, people will make financial decisions if they just sort of are forced into it at first. So like, you know, if you have, make people opt out rather than forcing them to opt in.

• 45:14Speaker 04

  Yeah, a lot of retirement plans have that where it's, you know. If you sign up and when they turn on the the plan after your waiting period, maybe days or one year, whatever.

• 45:23Speaker 03

  It automatically kicks in. Rather than you having to contact HR and opt into it, now you have to contact them to opt out. Say, hey, why are you withholding the 401k? Take that out. And it has a big difference. It makes a huge difference.

• 45:38Speaker 04

  Yep. And to go back briefly, you accidentally said 60. It is age 50 when that catch-up contribution kicks in.

• 45:43Speaker 03

  Yeah.

• 45:44Speaker 04

  A minute ago.

• 45:45Speaker 03

  Okay, Alan, another question from a listener asking about the use of AI in mortgage lending. What's been your experience or where do you see the future?

• 45:55Speaker 05

  So AI has become a component of underwriting for mortgage finance. And the reason why is because it takes the emotional aspect of the human oversight out of the equation. Very specifically, when it's calculating certain income forms, appraisal, evaluation, and quality control. That's where I've seen AI most used is that audits are completed by computerized modeling that goes through and looks for consistencies within a file and then finds any things that don't match the criteria. And it brings it up as a question. So very specifically, if somebody's underwriting a file,

• 46:35Speaker 05

  you run these through something called an AUS or Automated Underwriting System. That in and of itself is AI. Now, built within those are parameters. If you fit the parameters, it will spit out an approval. There may be additional conditions if the person has variable income. Let's just say, for instance, this person has hourly income, but after a certain amount of hours with overtime, they stop accruing base. They will only allow you so many hours. So now you have to average these hours. Or somebody has base hourly plus commission, or they get bonus structure. Well, those are all considered to be somewhat variable versus a salary, right?

• 47:17Speaker 05

  So AI is used all the time. The biggest component that we see that's problematic for AI is that sometimes it flags things that a human would say, okay, that's within the norm. And it has caused lenders to have to buy back loans that have been serviced for five, six, seven, eight years.

• 47:37Speaker 03

  Buying back because they-

• 47:38Speaker 05

  Because there was a defect in the loan quality.

• 47:41Speaker 03

  Oh.

• 47:41Speaker 05

  But now they have the technology to have scan technology where it can actually read not only type sets, but-

• 47:49Speaker 03

  Handwritten notes and interpret it and-

• 47:51Speaker 05

  And look at appraisals and everything. So it's, it's quite, uh-

• 47:56Speaker 03

  That's impressive.

• 47:56Speaker 05

  Quite the big deal. And, and it is being used regularly. But its premises, it's supposed to be fair.

• 48:02Speaker 03

  Yeah. Right. You're taking the human emotion out of it. You're just looking at numbers and words and determining whether or not somebody can qualify for it. What happened to the good old days when you could look at somebody in the eye, square in the eye and shake their hand and give them a loan? Those days are long gone.

• 48:16Speaker 05

  Long gone.

• 48:17Speaker 03

  Well, Alan, thanks so much for coming on the show.

• 48:19Speaker 05

  Thank you, guys.

• 48:19Speaker 03

  We got so many more questions here. We ran out of time to cover them, but tune in tomorrow. We're going to cover these questions really, really great. We really appreciate our listeners. We're very grateful that we've been able to do this for over 20 years here in town. And we are, uh, gonna keep doing it. So thank you again for tuning in. Want to remind our listeners of these three things as we go out. Be smart, be safe, and always be money wise.