Welcome to Inside Hawaii Real Estate, a show dedicated to providing up-to-date information news to Hawaii home buyers, sellers, and investors. I'm Will Tanaka with my co-host, business partner, and wife, Leonie Lam, a realtor with over 20 years' experience in various leadership roles in the Hawaii real estate industry. Thanks Will. Will is a lawyer and also the former head of a Hawaii title and astral company, and we work together as a team full-time in real estate to bring you the latest in Hawaii real estate. And we are so excited today because we have an expert guest with us and he's going to be giving us insights into what you really need to know before getting a mortgage. So we have here with us Spencer Lee. Spencer is the vice president and sales manager at Central Pacific Bank. He has a lot of responsibilities there, but one of the most amazing things that Spencer does at Central Pacific Bank is he oversees the teams, the lending teams. So he's really overseen thousands of mortgages by this point and still continues to oversee them. So he also teaches at the Honolulu Board of Realtors. He teaches about affordable housing and the reason he does that is because he's incredibly passionate about affordable housing. But you know what's most important is Spencer is an amazing father and husband. So welcome Spencer. Hi Leonie. Hi Will. Thank you guys for having me. Great to be here with you. We're so excited to have you on Spencer and you know everyone has heard of the terms mortgages and today we're going to take a deeper dive into the world of mortgages. And last year you know there were over 70 billion in dollars in loans given out to homeowners just in Hawaii. I mean that's a lot of money and you know we hear about interest rates and Spencer let's just start with the basics. How do mortgage interest rates actually work? Yeah that's a great question Will. Mortgage interest rates they're mostly determined by a couple of different factors. I think for people watching your show they should really know that their personal situation is going to affect the mortgage rate. So whether that be you know their FICO score you know it could be their down payment. It could be the kind of property that they're buying. All of these things are looked at by a bank or a lender. That's one factor. Another factor is what's going on in the economy. Interest rates are kind of set by investors and you know a lot of analysis goes into interest rates by banks and lenders but you know the baseline is kind of what is the market you know investors out there willing to pay for mortgages. So that's a big factor and also know too that interest rates really do come in a range. So for example right now people can get interest rates maybe as low as 6.5% on a 30 year fix or it could be as high as 8% and of course everybody wants to six and a half or anything on the lowest side but to get there buyers will have to pay what's called discount points and they're basically prepaying some money to discount the interest rates which brings down their monthly payment. So they'll save some money every month and there's usually a break-even period five six seven years into the future that it takes for them to recoup their their discount points that they had paid up front and then after that break-even point then they really start to save money. So yeah big picture their personal scenario kind of what's going on in the economy and where interest rates are at and also know too that there is typically a range of interest rates that people can select from. So people definitely want to get the lowest interest rate possible like you mentioned so could you kind of explain a little bit more about the discount points like how does that work or is that like that's a percentage of the loan amount or how does the discount point thing work? Yeah great question so paying discount points is really a best analogy is like buying a solar panel system or a photovoltaic system if a buyer were to pay discount points upfront it's typically a percentage of their loan amount so one point is one percent of their loan amount their loan amount's five hundred thousand one percent is five thousand dollars for example so say a borrower words you agree to pay one point in this situation then you might imagine that their monthly payments might go down a hundred dollars a month right because they're getting a lower interest rate maybe they save a hundred dollars a month by getting that lower interest rate well over the year they will have saved one thousand two hundred dollars because 12 months in a year so after four years you know they will have saved four thousand eight hundred dollars so if they paid you know five thousand dollars upfront it's roughly four years and two months that it will have taken for them to recoup that initial five thousand dollars cost upfront and then after that four years and two months then they really save money because the first four years and two months they just paid themselves back the five thousand that they had paid upfront and only after that break even period do they really start to save money so for people who are going to live in the property for a long time you know they know they're not going to sell they have a very low probability of refinancing those are the folks that really make the most sense to pay points upfront but people are going to sell their property right away or people who think that they can refinance before that break even point it would make less sense for them and they would likely not pay to some point and yeah so that means like you should just really pay attention as a borrower like you're looking at getting a mortgage loan to what that break even point is going to be in your situation yep yeah definitely and that that's the you know goes along with working with a loan officer you can really crunch the numbers to the penny you know give you an exact future date in the future and kind of work with you on your specific situation to do what makes the most sense for you you know earlier you talked about personal you know situations you know every individual every family has various scenarios where you know whether they're making fifty thousand dollars a year three hundred thousand dollars a year and you know from a lender perspective what do they actually care about when they're looking at okay we want to loan to this couple who has you know young kids and you know from their perspective it's not like okay we want to give them everything they want because we like them so so well what's the reality well what what do banks and lenders actually care about a great question so there's actually four standard industry killers if you will in the mortgage industry at the first is the debt income ratio so what lenders are looking at is what are your monthly debts relative to your income and by debts we're talking about that that would show on your credit report so any mortgages any credit cards student loans car loans those are all debts a lender would not be considering you know your cell phone bill your grocery bill you know your wi-fi so for somebody making ten thousand dollars a month if their housing payment plus their car loan student loans and credit cards might be five thousand dollars well five thousand relative to ten thousand is a debt income ratio of fifty percent for example the most lenders will not want to have your debt income ratio exceed fifty percent in in most loan programs the second pillar is asset so lenders want to make sure that you have enough down payment they also want to make sure you have enough to cover the closing cost and they want you to have enough typically for some reserve post closing they want to make sure that that you have some money after you close the third pillar is credit worthiness so we had mentioned FICO score that plays a big role in whether or not you can get the loan your credit history your credit usage all of those things are evaluated and the fourth and last pillar is the collateral so remember the home that you're buying access collateral on the mortgage that you're getting and so banks want to make sure that that's a good piece of collateral it has to be at a certain condition level you know that it's not any that doesn't have any safety soundness habitability issues because remember if you stop making your payments then the bank could take that property from you so they want it to be in good shape you know let's go back to the debt to income ratio so just kind of take it down to the basics so a family makes a hundred thousand dollars a year so you're saying that with car payments and student loans and other types of debts if they make a hundred thousand their debt could be even fifty thousand outstanding is that how that works yeah um the best way to look at it is on a per month basis so I could use your a hundred thousand annually but let's just make it a little easier and say ten thousand dollars a month so in that situation the bank would not want you to have monthly debt and housing payments that exceed five thousand because that would make your ratio of exactly fifty percent once you break that fifty percent threshold in a lot of programs you're disqualified now also keep in mind if you have a very low FICO score or if you're buying an investment property that's more risky the bank might want to cap your debt to income ratio at four thousand forty five percent forty three percent it could be forty percent again the lower your credit score and the riskier the loan is then your debt income ratio cap might be lower than fifty percent so what I'm hearing is that credit score really matters and then I heard you mention that a couple of times FICO so could you like kind of get into what is FICO credit score and like how impactful is that when you're being considered for a mortgage loan okay great yeah FICO score and credit score are really interchangeable terms um you can think of them as really the same thing so when it comes to credit score um again if you have a low enough credit score some you might not be able to get any mortgage whatsoever um you know depending on the lenders that cutoff might be six hundred twenty it could be five hundred eighty um and also just because you can get a mortgage doesn't mean that it's going to be a good price so if you do have a six twenty FICO score um you know just know your interest rate pricing is going to be much much worse than somebody who has a hundred FICO score um it could affect the amount of points that you have to pay so two people with one low FICO score one high FICO score they might have the same interest rate but the one with the low credit score might have to pay more discount points for that same interest rate and yeah having a good credit score versus having a bad credit score it might mean the difference between getting a mortgage uh getting the actual home that you want it at the loan amount that you want at the rate that you want uh so definitely do your best to protect that credit score yeah and Spencer you know just going back to the assets so let's say that a family they qualify because they qualify for the minimum debt to income ratio but they don't have the funds and let's say that they're getting some help from family members so if um they want a a gift fund or their parents are helping out how how does the uh the banks and lenders look at that when it's not coming from the actual lenders I mean the homeowners but you know from someone a family member outside that's going to be giving them down payment yeah uh great question so first of all let's just talk about what a down payment is the down payment is going to be the difference between the purchase price of the unit of the home that you're buying and the loan amount so if you're buying a $500,000 home for example and your loan amount is $400,000 you know your down payment in this example is $100,000 right um typically for a home that you're going to be occupying we call that a primary residence the full down payment can come from a family member in the form of a gift meaning no repayment is expected if you're buying a investment property you might not be able to get any gift funds the banker lender might require that you get no gift funds or limit the amount of gift funds that that you can't get um you know just know that not every loan program requires a down payment or even 20 down payment for example VA loans for veterans active or retired are great mortgages for our military and they don't require any down payment if they don't want USDA loans those are loans for properties and rural areas they would also be eligible for a zero down payment the government does have some other lower down payment options for people who might not have the full 20% FHA loans come to mind where the minimum three and a half and Fannie and Freddy loans also have a 3% down payment option um however if you're putting down less than the full 20% just be prepared to pay for what's called mortgage insurance um MI or PMI which stands for private mortgage insurance that's where the home buyer has to buy insurance to cover the bank or lender should you default now that MI is only required on mortgages where the buyer is putting down less than 20% and the smaller the down payment the more expensive the mortgage insurance is because the less the smaller down payment means that it's a riskier loan so therefore the buyer is going to be required to pay for more mortgage insurance um it's definitely something to factor in because there's no free lunch putting down a lower down payment sounds great but just know that it it does cost more money in the form of a higher monthly payment you can also get a second mortgage where your first mortgage is at 80% and maybe your second mortgage is another 5 10 or 15 percent that avoids the mortgage insurance part of it however you do have to pay a monthly payment for your second mortgage so again not not a free lunch there which is another option and for the mortgage insurance you know that a borrower may be subject to is that something that is finite or is it like for the life of the loan like how does the mortgage insurance sort of payments work yeah so typically the mortgage insurance payments are paid in the form of a monthly additional payment amount which is fixed for the duration of the time period that you have mortgage insurance it's not always the case but that's just generally what most people go with and in that situation the buyer is going to be paying mortgage insurance for roughly seven years or so or until the loan to value gets to 80% or less if they don't make any additional payments there's also a lender paid mortgage insurance where the bank would pay for the mortgage insurance cost but as the homeowner you have to agree to accept the higher interest rate and that higher interest rate would be for the life of the loan one option and another option is where the buyer just pays a large upfront cost so it's upfront MI and if they do pay a large upfront cost then there would not be monthly MI you know on an ongoing basis because they just paid a lump sum upfront instead so the bottom line is as much as possible if you could put down 20% then we don't have to worry about the mortgage insurance or additional costs and payments for the home owner is correct that's right yep if the homeowner the buyer can put down 20% then mortgage insurance is not required but then also for people who don't have the 20% like you mentioned a whole array of different products or programs that they could a buyer could participate in so they could get into purchasing a home that's right if they don't have the full 20% they can still buy but they just have to be prepared to pay mortgage insurance okay always learning something new and you know especially when the interest rates are so-called higher than in previous years you know I've heard a saying you marry the house and date the rate so in terms of refinancing typically like how would someone know if it's time to refinance is it just because lower interest rates from their current loan rate or what should go into analysis from a homeowner's perspective yeah I love this question because I think a lot of people are confused about it first and foremost you need to know what your existing interest rate is and then after you know what it is then you can hope wait for a time period where interest rates are lower and then we can do some simple math to see if it makes sense for you to refinance anytime you refinance there are always closing costs there's many third parties that need to get paid for their services like Tidal, escrow, the lender, the appraiser, full credit the list goes on and on it varies what those closing costs is on every transaction because it's always specific to the property but let's just ballpark and say on average it's five thousand dollars what we would do is just look at interest rates at some point in the future and see if the amount that you're saving every month will make up for the five thousand dollar upfront cost in a reasonable time period so again let's take for example somebody who might refinance and they would save a hundred dollars a month by refinancing say their interest rate is seven and a half percent and they go to seven point two five and by doing so they save a hundred dollars a month well again hundred dollars a month means twelve hundred dollars per the year and if closing costs were five thousand dollars to refinance it would take four years and two months to recoup your upfront costs in that situation the buyer may decide to refinance or they might not typically anything less than five years it starts to make sense anything over five years of a break-even point I would advise not refinancing some people want to hold off and and you know wait for a time period where interest rates are going to be low enough such that they would recoup their closing costs in two years or three years everybody's a little bit different some people are you know serial refinancers and happy to refinance down and down you know a quarter of a point each time but you know just know that there's costs associated with that so you know generally speaking I would say if you could recoup your closing costs about five years or less it makes sense and even for a VA loan if it took more than five years to recoup your closing costs the the VA wouldn't even let somebody do that for the refinancing is it true like if the rate came down like by one percentage point is that a good time to refinance or is that like a myth that is definitely a heavy truth where if you're saving one percentage point you should definitely refinance you know even if you're saving a half it starts to make sense so let's say somebody is has a $500,000 loan amount and they can drop their interest rate by one point well one one percentage point on you know 500,000 on a $500,000 loan would be $5,000 right so roughly in a year's time you would be saving that amount of closing costs so yeah your break even point is roughly a year and in that situation so you should definitely do it and you know like right now one of the hot topics is affordable housing and there's some new you know construction new development here in on the island of Oahu and if people are interested in getting a mortgage on affordable units is it a different process is it a same process how do banks and lenders look at affordable units versus just the regular market rate units yeah so affordable units come with additional deed restrictions and resell restrictions if somebody is buying an affordable unit it's mostly the same process as you know buying a non-affordable unit the lender might be involved with the eligibility check because the housing finance agency the the agency that's offering the affordable unit might require that the lender do some eligibility checking but it's mostly the same big picture for a purchase mortgage for refinances however that they are very different the lender is heavily involved with working with the local financing agency the housing financing agency in getting approval to even do the refinance I think in either instance that I would definitely recommend that the buyer of the home or the person refinancing work with a local banker lender who's familiar with affordable mortgage you know mortgages on affordable properties just because the lender is going to be working with the local housing agency so I think it is important to work with a local person for those mortgages and you know for those thinking about getting a mortgage loan are there any pitfalls or anything that you could kind of share with us some insight that they could try to avoid yeah I definitely advise people do not over commit when getting a mortgage it's very easy to get a mortgage that the bank might be willing to give you but then you're uncomfortable with the housing payment so in those situations you know being house poor meaning you have a nice house but then you don't have very much money to live a normal life every month it is not not a good situation to be in you know I think that working with a good mortgage loan officer is very important because you know I feel like the advice that I give people is very similar to what a financial advisor might advise people on you know financial advice life advice you know steering people in the right direction I think that's important and I think that borrowers need to really understand the term of the mortgage that they're buying you know I'm sure there's no prepayment penalties you know ensure that there's no change in interest rate along the way you know locking your loan off all of those things are really important you know and keep in mind that if you don't pay your mortgage the bank could foreclose on your property meaning take it away from you so you definitely don't want to take on more debt than you can afford you want to make sure you have good job security because you need that job to pay your mortgage you know it's not always the case that home prices go up they could go down and you don't want to be put in a position where you have to sell your home you know just because you can't afford it and maybe take a loss where you're selling it for less than what you bought for if you do have late payments then it's going to affect your credit score so we don't want that make sure you work with a reputable lender somebody who's getting a referral from from somebody you know and trust is a great idea and just ask lots of questions throughout the process so that you're not confused that you feel good about what's going on that you fully understand everything you know a good banker lender will be transparent about all of their wow that was a jam-packed show Spencer the VP and sales manager of central pacific bank you are amazing thank you so much for being on our show thank you Spencer you guys are so kind thank you for having me it's been a lot of fun thank you so much and aloha aloha