Are we about to see mortgage rates go higher? Could now actually be the best rates we’ll get for many years, even decades? Joining us is our repeat guest, Aaron Chapman, one of America’s top producing mortgage brokers. Aaron is going to share the mortgage market outlook, and how history is hinting that the best years of interest rates may be over!
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Are Mortgage Rates At The Bottom Right Now? With Aaron Chapman
Thank you so much for joining us. I appreciate that you’ve been binging on these shows. You’ve been sharing it with other people. We’ve been loving it. Thank you again for rating us on YouTube as well as on Apple iTunes. As a reminder, if you have any information you want to be able to find out or learn more about us, you can always go to MoneyRipples.com and check that out. I brought on a repeat guest again, a guy that we did a two-part episode with last time. We were talking about mortgages, how that works and why you want a 30-year mortgage.
We’re bringing Aaron Chapman back again. If you guys don’t know, he has been in the finance industry for about 25 years. The guy is in the top 1% of mortgage brokers in the country. He’s doing over 100 different loans per year. Plus, out of 300,000 people in this industry, he’s in the top 1%. He knows this stuff. We’re going to talk about how can you take advantage of what’s going on with the interest rates now to be able to use this with real estate investing. We might even talk about how that all works together with infinite banking too. Aaron, welcome back.
Chris, how are you doing?
I am freaking awesome and tired at the same time. I just got back in town. I know we were both at a conference so it’s good to see you.
No conferences, because you’re on the whole damn time and you go in from Thursday to Sunday and then you come back and now you have to deal with all the stuff you created while you’re there. I took Ellen, my Head of Operations, with me and that helped create even more. We got more to do, which is great. It’s what we want but it does take a toll on it.
Something interesting about the stats you’re giving. I appreciate you throwing all those stats out there. I come to a discovery. I got a call from this outfit called Modex that tracks everything that goes on in my industry. There are 1.4 million people that do the job I do. The 300,000 is the licensed guys. You’ve got a lot of unlicensed people that work in the banking sector, the actual federal chartered banks.
As a result of that, there are 1.4 million of us. The average person that 1.4 million doing between 0 and 1 transaction per month. We’re averaging a little over $1,200 a year for the last few years. I’m doing $100 a month compared to 0 to 1 a month. It could be 99 times what the other people are doing, which is pretty wild to consider how blessed we are for the amount of business that rolls off my desk to my team.
It’s all mostly for real estate investors. We do a lot of your people’s primary residences. We do regular mortgage deals and then we use those same types of regular mortgage deals to do loans on investment properties. We utilize the infinite banking strategy with many of our clients to help them to build this engine to create wealth.
That’s the thing I want to talk about because the one thing that became apparent when we were at that conference over the weekend, at least became apparent in my mind. Even though it wasn’t said, it’s kind of what you hear when you start to derive from the things you’re hearing. Most people are waiting for that opportune moment.
They’re waiting for the opportune time of, “I’m waiting for those mortgage rates to come down to this exact mark or wherever it was before. I’m waiting for the Feds to do this or do that.” Usually, by the time you hear it in the news, you’ve already missed the boat. What’s your perspective now on rates and what’s happening?
What I tell a lot of people is there’s a lot of speculation that rates are going to get better. We’re going to get some sort of normal market. What people don’t realize is what a normal market really is. People say we’re going to get our rates back into a normal market. I always have to ask them, “What is a normal market to you?”
You then start to listen to them talk about the interest rates that were in the 3% and the 4% or the 2% for your owner-occupied loans. When you start understanding their experience, their experience has only been the last 8 or 9 years. In the last 8 or 9 years, you go back even before that. 2009 started the quantitative easing process that was being shoved up by the federal government, where they’re creating money out of thin air and shoving it into the markets to create liquidity for us to build lend from.
I encourage everybody to watch The Big Short. That tells you the history of mortgage-backed securities. The loans that you get from the banks from mortgage guys, it’s not their money. It’s not that bank’s money. It comes from mortgage-backed securities. There’s this pool of funds that are created out there that investors can invest in. It’s no different.
What’s funny is people like to track the US treasuries. They want to look at the ten-year to tell you what interest rates are doing. The ten-year is a whole separate thing. That’s another bond. You’re lending money to the government. You’re buying this bond for ten years. They’re paying you a flat rate of return for ten years before you get the principle back.
It’s the same thing. You’re putting the money into a mortgage-backed security. They’re paying you the rate of return, plus the principle to pay it back over 30 years if it’s a 30-year bond. If you understand mortgage-backed securities, you can see the mortgage-backed securities trade day in and day out. This is what’s going to tell you what’s doing with the mortgage-backed security.
When I get to share screen capability, I’ll be able to show you guys the actual mortgage-backed security being tracked. We got it right here. I’ll explain what we’ve got here. What you’re going to have is every day they’re going to have it tracked by what they call a Japanese candlestick. It’s going to start at a certain point. It’s going to end at a different point.
If it’s green, it means it improved that day. If it’s red, it means it lost ground that day. People sold out so the trading went backwards. We’ll follow these trends of where it’s going. We’ve stabilized but we’re still seeing some negative movement because it’s the type of thing that’s going on in the market. It’s being driven mostly by fear. It’s being driven by the economy and inflation.
Inflation’s way out of control than they want to make it. With all those things, we’re seeing mortgages get a lot hotter and higher over the last year and a half. We talk about the normal market. What is a normal market? A normal market is going to be higher than the interest rates we’re experiencing right now.
Right here, if we’re looking at the mortgage-backed securities, I referenced the green ones and the red ones. This one shows you a very positive day. It started very low and a lot of money filtered into the market that day. They felt confident with the inflation readings to put a ton of money into the market. They’ve continued to have some positive days.
We then get to a point up here where if you look at these lines that I’ve drawn, this is a line that would be a level that most traders might do a sell order. You can see how often they sold off when it hit that line, then we went down to what would’ve been a support, which had been a buy order. There’s enough negative news that day that went below that support.
Now, we’re in a much more negative position. Our rates are higher than they were six trading days ago. This is a lot to explain here. Just know we’re watching these charts all the time to tell us what to expect but it’s hard to expect anything because there’s so much going on in the economy. There’s so much going on globally that can drive the rates one way or the other.
One thing when we’re talking about the normal market thing that I referenced earlier, we track the interest rates from 1971 until now. That’s when 30-year fixes have been available. From 1971 until now, the average interest rate for homeowners, buying a house to live in and getting a 30-year fixed mortgage, which is another thing that we do, 7.769% has been the average since 1971. If you take out quantitative easing where the federal government created money and dumped it in those pools to lend out at cheap rates, that $8.9 trillion they created at thin air, you take that out, the average interest rate from 1971 to January 2009 is 9.11%.
Let’s get back to the normal market, meaning the market itself, the people out in the world investing in this security, 9.11% is what it was when the normal market was operating. What we have is interest rates in the low 7s and high 6s for investors. We’re below the normal market people. I tell everybody, “You need to lock now because I have no idea what 13 years of quantitative easing is going to have as far as an effect on the market.”
People can claim that they’re going to go down. They don’t have any evidence of what’s going to bring it down. Any other thing that’s going to bring it down is creating more liquidity to shove into it. Are they creating more liquidity? No, they’re trying to take liquid out of the market because our inflation’s been out of control. How has inflation gone out of control? Too much money chasing too few goods.Our inflation has been out of control. How? Too much money chasing too few goods. Click To Tweet
We have supply chain and labor issues. We got shortages of housing across the market. Since we have shortages here and you want to get the inflation under control, you have to shrink the supply of capital. You have to shrink the supply of money that people have to spend to get inflation under control. How do they do that? Jobs. We’re losing jobs like crazy. People are getting laid off all over the place.
The jobs report came out last week, 90% BS. I don’t know if I’m supposed to say that on your show but that’s what it was. The Bureau of Labor Statistics report showed 800,000-some odd jobs but when you start peeling back the layers, they created a new algorithm in the report. Based on our population, that added 809,000 jobs to the bottom line for this fictitious algorithm.
We don’t have those jobs. We don’t have that money coming in. They’re trying to shrink the supply of cash because we have a shrinking supply of goods. They got to get inflation under control but they also have to make it look like they’re creating more jobs. Our so-called current administration looks like they’re doing something, which we know they’re not. We have this massive mess turning around.
What I need to tell everybody is, “Control your control as long as you can control it. If you’re going to invest in real estate or you’re going to leverage real estate, leverage it now for 30 years. Don’t get suckered into the arms. Don’t get suckered into the 10-year fixes or 20-year amortizations. Those are destructive. They will put you in a bad spot. Get those 30 years. Hold it because we have no clue what’s going to happen coming forward.” I have seen a lot of things. I’ve been in this since 1997.
I get a lot of real estate investors that I see put stuff out on social media on different groups that I’m in, like masterminds. A lot of them are convinced that the rates are coming back down. They’re like, “The Feds are going to stop raising rates in a few months. Maybe one more hike and then we’re done,” which I think is crap. What do you think about that when you hear that? Do you think it could go down on the mortgage rate side? Do you think it’s going to start going up continually on this 30-year fix, especially?
The only way to get the mortgage rates to come back down and go down significantly is to get inflation under control. Think about this, the time value of money. What happens to the value of the dollar with inflation?
It goes down.
Your buying power shrinks. Here’s how to illustrate this. I was 22 years old. I go to Taco Bell, get 2 bean burritos, 2 tacos and a drink for $1.99. Do you remember their value menu?
My daughter wanted to go to Taco Bell the other day. I haven’t been there in a long time. I’m like, “What do you want?” She wanted 2 burritos and 2 tacos and a drink. I’m like, “$1.99. No big deal.” I drove through that drive-through and $15 is what they wanted for them. That’s how much things have changed since I was 22. I’m 48 so it’s 26 years.
It’s a length of time but $1.99 to $15 is a big jump for something like that. It tells us what’s happening with the dollar’s value. It’s declining that rapidly. In an 8% inflation, that means a dollar’s losing 0.666% of its value. I know people say, “They’re saying inflation is six-something. The CPI.” The CPI’s been cooked for a very long time. They have changed how you calculate the CPI constantly.
They only look at specific items, not the real state of the economy. For the real state of the economy, go to ShadowStats.com, look at their alternative data and go down to inflation. You’re going to find it somewhere right around 14%. Just going off the top of my head. Look there to get accurate. Don’t say, “Aaron Chapman’s wrong.” You do the look.
It’s in the teens. If I use 8%, that means our dollar is losing 0.666% of its value every time you pay a payment on your loan. That being the situation and inflation doing that, nobody wants to give you money for 30 years and let you pay it back with something losing value so fast. What’s going to happen is they’re going to see how that is under control. That’s going to drive more money into the bonds if inflation gets low. We don’t see that. I don’t see that particular thing happening.
The Fed lowering rates has nothing to do with mortgage rates directly. Nothing has to do with your credit cards or a thing like that. There are quick overnight rates. It’s the rate between the banks is what they’re doing and it’s an overnight rate. When the Fed raises rates, it slows down or increases the cost of things to the average human being.
Therefore, they should be thinking twice about spending money putting themselves into a much cost of your debt. We’ve created credit cards and so many ways for a person to spend money indiscriminately, we’ve created a psychological effect of spending so inflation’s not getting under control. What’s funny is there was a guy there at our event with whom we had a call and he mentioned how they raised rates quarter percent so rates went up and people’s mortgages went up. It went down because when they raised the rate on the federal fund level, the cost of goods got more expensive.
People held back on spending, inflation went down, mortgages got better and more money went to mortgages. Therefore, our rates dropped by 0.5% in cost. They got better. Just because the Fed raises the rates doesn’t mean it’s going to get better. If the Fed starts dropping in today’s environment, we would risk an inflation spike or risk of inflation. Therefore, mortgage rates may go up.
Raising the rates oftentimes has a negative effect on mortgage interest rates or an opposite effect on mortgage rates. Those who tell you, “If the Fed does this or that,” and they’re trying to correlate the same, all that tells you is that person doesn’t know a thing about what they’re talking about. Let the real estate guys worry about what type of faucets to put in the house and whether it should have tile or laminate flooring. Let us, the lenders, worry about the loans and the rates.
The thing about most lenders, especially in today’s environment, I’ll caution you on this too is they’re doing the average guy doing between 0 and 1 transaction per month. They’re going to tell you whatever the hell they have to get you to close a loan. A lot of them are going to offer arms and short-term deals because it looks better in your cashflow.
Turn around and get the hell away from those guys as fast as you can because they have no idea what they’re doing. I’ve been working with investors since 2003. I’ve been doing this since 1997 with thousands of deals. I don’t care if I close the one. What I care about is you having a successful business. I can close your number 10 or you’re number 20. If you fail in 1, you’re not doing 2, 3 and 4. If you’re successful on 1, 2, 3 and 4, you’re going to do number 20 and we’re going to be there standing there with you.
When I used to do mortgages, the one time I followed the ten-year treasury yield specifically was because that would tend to affect the arm rates. Arm rates change all the time based more on how those yields are going, the Federal Reserve and everything else. Whereas the 30-year mortgage note is a little bit different. It doesn’t quite move that way. It’s more stable and steady.
It’s 100% more stable because the people putting their money in there know it’s going to be locked for a longer period. When you’re doing the arms, they’re going to be tied. It used the LIBOR index but that’s gone. We’re still tied to the treasury. It tied to 2-year, 5-year, 10-year or 7-year, that kind of thing. Yes, it will move with that. As that adjusts, it’ll adjust but it’s also locked in for an adjustment year after year. Now is not the time to put yourself in that position. I will constantly scream to the person who needs to lock it up and control it for as long a period as possible.
I’m trying to remember the exact quote you set up on stage but I thought it was a perfect little sound bite.
Was it the Buffett quote?
Not that one. It was your own quote. It was about, “If rates go up, you look like a hero. If they go down, you refi.”
That was the Warren Buffett quote. Warren Buffett says the third-year fixed is the greatest financial instrument in history because it’s a one-way bet. If the rates go down, you were wrong and you bet on 30 years and it goes down, then it’s refinancing. Big damn deal. If they go up, you’ve protected yourself from significant financial devastation.
The reason I brought that up is that there was a significant amount of people in that room that bought in a specific state with a specific lender that could close the loan in 3 weeks instead of my 4 weeks and give them a 10-year fix with a 20-year amortization. The big selling point was you can get a 25% lower interest rate and close a week faster.
My question was this. How do you feel about that 25% and that week? Now you know that in the next 3 to 4 years, they got to refinance. That 25% doesn’t matter anything now because the interest rates have more than doubled. Now, they also had a shorter term, that 20-year amortization. That means they’ve paid more for the house. Although a dollar was worth more, they spent more money. It costs them. It’s counterintuitive. This is going to be a hard thing to wrap your heads around but the faster you pay off the house, the more you give the banks. Only give them what they’re willing to take.
The other thing is the reason you get a lot of banks trying to get you to refinance every 4 or 5 years, that’s a very common thing. It’s because they don’t want to hold it for 30 years. If they hold it for 30 years, they lose money. They want to convince you to refinance in the first five years. Why? Look at your amortization table. It’s a pile of interest in the first five years.
I have a client who has a case study I showed him. He started with a $120,000 mortgage. He called me four years later and said, “It’s time to refinance. The rate went down.” I said, “No, not unless you’re pulling cash out. It’s a stupid move.” We argued a bit. I finally acquiesced and did it because that’s what he was traditionally taught. Refinance if the rates drop a certain percentage.
He had paid almost $37,000 in payments over that 4 years. His balance went out down barely over $6,000. He paid almost $37,000. The balance went over $6,000. By the time we were done with the refinance, he had $6,000 between closing costs, appraisal, taxes and insurance. He added it to the loan. His new loan was $102 less than the original loan.
He reset that where he’s in that heavy interest period. What does that do for him? He still stays in financial servitude every year. If he does that every 4 to 5 years, in 20 years, he’ll have almost as much as what he started, 20 years before. Where if he went the other direction, like I said to stay with the loan, he’d only have 1/3 of the balance left. He paid it with a divination instrument like the US dollar.
When you’re a real estate investor, don’t take your cashflow to pay down the mortgage any faster. Keep that money and reinvest it somewhere else. Independent banking strategy, go that route. I highly encourage you to do that. As you’re paying it back, you’re paying it back as it’s diminishing with somebody else’s money.
You’re writing off the interest as if it was yours. You get to keep the spread as you’re raising rents because we’re an inflationary environment with reds increasing year over year. Your cashflow’s compounding in growth. What you’re paying back is compounding in decline and you’re winning. I have an app. You go to the app store, the QJO Investment Tool.
It’s called the Quit Jerking Off Investment Tool. Download it. Go to the question mark on the corner. Reach out to me. Download it. I will send you the videos on how to use it. Send us a message on my website. I’ll send you 4 or 5 videos. I’ll send them to you, Chris so you can push that out to everybody to understand the time value of money. You never even pay back what you borrowed if you pay it back over 30 years.
That whole compound versus simple interest is that big key thing that when I learned, it blew my mind what you could do with that. Also, how little you pay interest on a mortgage.
People calculate incorrectly all the time. It’s not their fault. That’s what they’ve been taught. My job is to ensure that everybody hears the problem. I’m one voice amongst hundreds of thousands of other voices that don’t get it. Believe me, nobody else gets it. There’s nobody else talking about it in my space. They don’t care. They just want to close alone. I need you to be successful. I’m sending you this app right now, Chris.
You have me download it before, too.
Now, you have the videos on how everybody uses all those calculators.
I appreciate it. I know that’s going to be some good stuff. Some comment on what you said is useful like when you’re comparing yourself to that other loan that people thought they were getting a good deal on. That 20-year amortization versus 30-year makes you pay a higher payment, therefore you get less profit off that property.
Right now, especially, we hung out with guys that have turnkey properties and things like that. Some of those turnkey guys have very little profit. They have very little to give. You start trying to do some 20-year mortgage and now maybe you’re breaking even on your payments. That’s a risky move to take. You want as much profit as you can get.
I’m with you on the whole profit thing. When it comes to the profit, you got to understand where your profits are, especially as a turnkey investor. The profits as an investor, the one buying those and holding them for 30 years is not all your cash on cash returns. It’s not the cash that falls into your bank. You want to be sure you’re not going negative but too often, people are so focused in on, “What’s my cash on cash return?”
They’ve failed to realize that paying down the mortgage, having somebody in the house making the payments, never leaving, taking another penny out of your pocket to pay the mortgage or the maintenance or the utilities or the taxes, that alone will return to you 10.25% annually on your initial investment.
I can show you guys that all day long that’s how that works. It’s a compound growth in itself. You get the tax deductions, then you get the appreciation and depreciation. Depreciation plays huge if you’re trying to save on tax money. Every year, you get to raise the rent. You eventually go from $20 a month cashflow. Within 5 years, depending upon what your base rent is, you can see it compounding $500 a month cashflow. You have to go a long game.
There’s one thing I want to point out and make sure people think about. When did you ever hear that you could start a business from the ground up and be cashflowing profitable from day one? It doesn’t happen. There’s no such thing. They always have told you, you get 3 to 5 years’ worth of reserves so you can start your business and be successful in 3 to 5 years.
That’s the way real estate has always been. If you want a cashflow, you got to be in it for 3 to 5 years. You can’t just buy 1 house. You got to buy 10. You’ve got to dig in and wait. We had this run of this extremely crazy interest rates and low prices coming back up off the crash because of that. That is why people have to see these cash-on-cash returns that were irregular for a long period.
Take that window of time out and throw it away because it doesn’t exist. I don’t know that it’ll ever exist again. It never existed before. It should never have existed. Now, we spoiled people and they don’t think right. We have a new generation of investors coming up. They will get it. They will take over the market. You guys have been around for the last ten years, you’re going to be left sucking at it in the background.
I appreciate you being on. We’ll share those videos with everybody and your app as well so people can download that and find them there. It’s such great knowledge and information. It’s so timely right now because I do believe people are missing out on an opportunity where you don’t see people in the news saying, “This is the time to lock your rates.” This is it. We could be wrong.
These could be the lowest rates we see in 40 years. Rates haven’t gone down since the ’80s, 40 years. We now saw the lowest they’ve ever been. We could even see them go up and climb for the next 40 years. This could be the lowest rate you’ll ever see in your lifetime, depending on your age. Don’t get suckered by these other guys out there trying to close you. Humans are the apex predator. We fall preyed. No other species except other humans. These craps are circling you.
Aaron, thank you for joining us. Everybody else, if you’re looking to refinance and/or looking to purchase properties right now, this might be your opportunity. This might be your window. I even hear people saying that the real estate market is picking up. It’s getting more competitive once again. You want to make sure you can take advantage of that while you can.
Be sure to reach out to Aaron and his team, not just on the show you’re tuning in to. This is useless to you unless this gets you to move to action. If you move to action, you get results. Go and make it a wonderful and prosperous week. We’ll talk to you later.
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About Aaron Chapman
Aaron Chapman is a veteran in the finance industry with 25 years of experience helping clients better understand, source, and finance cash-flow positive investment properties.
He advises over 100 clients a month in the acquisition and financing of their investment properties and primary residences. Aaron is ranked in the top 1% of mortgage loan processors in the country, in an industry of over 300,000 licensed loan originators, closing in excess of 100 transactions per month.