Melissa Cohn, Regional Vice President at William Raveis Mortgage, joins Yahoo Finance Live to discuss home financing amid expected interest rate hikes, credit lines, and the Fed's monetary policies.
- Bad news for homebuyers. Mortgage rates are now at their highest level in two years. And with the Fed promising interest rate hikes this year, is now the time to lock in a mortgage? Here to talk about it is Melissa Cohn, regional vice president at William Raveis Mortgage. Melissa, it's good to see you again. So you're based here in New York City. And I'm curious what you're seeing right now. Is there that rush to lock in mortgage rates? And what kind of mortgages are the most popular at the moment?
MELISSA COHN: Definitely mortgage rates have gone through the roof since the beginning of the year. 10-year Treasury ended 2021 at a 1.5% and was trading at a 1.86% the last time I looked at that, causing mortgage rates to go up anywhere from 1/4 to 3/8 of a percent, which has been a pretty strong increase in such a short period of time.
The 30-year fixed rate is still probably the most popular mortgage out there. 30-year fixed rates were still well below-- or below 3 and 1/2% I should say, no longer well below. But people are also looking at these long-term adjustables now. For example, you can still lock in on a 10-year adjustable at a rate of 2 and 3/4%, which can be a significant savings on a monthly basis between that and a 30-year fixed. And if you're not going to be in your home for the rest of your life, why not take advantage of the long-term adjustable and keep the savings?
- Hey, Melissa. It's Karina. Thanks so much for coming on. A lot of homeowners have locked in rates now, sort of 3 and 1/2%. Good majority. So won't that disincentivize them from trying to sort of refinance their loans at this point?
MELISSA COHN: Well, first of all, there are a lot of people who were not able to refinance over the course of the past couple of years, people whose jobs were sidelined due to the pandemic and didn't have the income to qualify for the financing who are now, as their income has been restored, ready to refinance. Plus, people refinance for more reasons than just rate. Do they want to tap into some of the incredible equity that they've gained on their properties over the course of the past two years? Do they need to consolidate debt? Do they need to take money out for a home improvement or for student loans? So there are many reasons to rebuy other than just trying to get a better rate.
- What about, you know, one way people try to do that is they'll take a mortgage with points, right, to sort of buy down the rate. When is that a good idea?
MELISSA COHN: So paying points is a good strategy for someone who's purchasing because your points are tax deductible in full the year that you purchase. If you're paying points on a refinancing, you don't get to take the full tax deduction. You have to amortize it over the life of the loan. So if it's a 30-year loan, you're only going to get 1/30 of the deduction on paying the points. But if you do pay a point, your rate's going to be 1/4% lower, or 2 points, your rate is a half a percent lower. And if you really think that you're going to be in your home for a long period of time, you may want to consider doing it.
- And then can you explain to us the difference between a home equity line of credit and a home equity loan and which makes more sense for who at which point?
MELISSA COHN: So the vast majority of lenders today pretty much just offer home equity lines of credit, or what we call a HELOC. And HELOC is a line of credit. It's a second mortgage against your home that's interest only for the first 10 years. The rate is set based on a percentage over the prime rate. Now, the prime rate today is a 3 and 1/4%. But when the Fed starts raising rates, the prime rate will go up.
And so as the prime goes up, that rate will go up. But it's an interest-only line of credit that you can borrow and pay back as you see fit for a 10-year period. And then at the end of the 10 years, there is generally a 20-year repayment period. A home equity loan would be a fixed-rate loan that would be a second mortgage where you would borrow a set amount with a set monthly payment. And those rates are generally pretty significantly higher than they are for a first mortgage.
So if you're taking a home equity loan, which is sort of good to have handy availability to the equity in your home, it's a good product to have. If you really need to borrow the money and you think you're going to have it outstanding for a period of time, you should probably consider just doing a cash out refinancing of your home and locking into a rate today.
- Now, Melissa, it's confusing for some people because the Fed, when they raise short-term interest rates, that doesn't automatically mean mortgage rates are going to go up. I know mortgage rates are tied to the 10-year Treasury. And they've been rising in anticipation of what the Fed is going to do. So where do you see mortgage rates sort of tapping out? Have they peaked do you think for now, even when the Fed raises interest rates later this year?
MELISSA COHN: I mean, I think that the markets have been extraordinarily volatile and reacted pretty violently to the anticipation of the Fed raising rates sooner versus later. I even saw an article today about maybe the Fed won't raise a quarter point. Maybe there'll be a half point one and done type thing.
And so the bond market has reacted. And bond yields have gone way up. But when the Fed actually raises rates, Fed funds don't have any direct correlation to the mortgage rates. It'll change a home equity loan because when the Fed raises Fed funds, the prime rate will go up lockstep with the Fed funds rate.
But the bond market may actually rally once the Fed actually acts and raises rates or starts purchasing bonds. And there'll be a relief rally. We'll be happy. Oh, my God. We've done it. And there's a good chance that bond yields could moderate again. It's very hard to think that the Fed really wanted 10-year Treasury yields to go from 1.5% to nearly 2% in a two-week period. It's too much too fast.
- Yeah. It has been a wild ride, for sure. We've seen this story, though, before. Melissa Cohn of Raveis Mortgage.
MELISSA COHN: Yes, we have. We've been down this road. Yeah.
- That's right. Good to see you. Thanks for joining us today.