Real Estate licensees representing buyers and seller in the current high interest rate environment need understanding and tools to satisfy the needs of their client. Just what do we need to know to succeed.
Understanding: Interest rates are high in order to slow the growth of inflation. As the Federal Reserve raises rates the banks have to “buy” money at a higher rate and this cost is passed to the consumer.
For a $100,000; 30 yr loan:
There is an increase in monthly payments and increase in earnings to qualify for each $100,000 in loan
Rate Monthly Principal & Interest /$100K Increased Earnings/Yr to Qualify/$100K
3.5% $449 Per $100,000 0 Per $100,000
4.5% $507 “ $3,093 “
5.5% $568 “ $6,346 “
6.5% $632 “ $9,760 “
For every $100,000, the Principal and Interest increases roughly $60 per $100,000 for each increase of one percent and the buyer’s income must increase $3,000 for each rise I one percent.
- Adjustable Rate Mortgage: Price the use of an Adjustable Rate Mortgage (ARM). From Forbes Magazine https://www.forbes.com/advisor/mortgages/current-arm-rates/ 9/13/23
An ARM is an adjustable rate where the first number (e.g. 5/1) is the years of base rate with the second number being the number of times per year that the base rate increases. In a 5/1 5.5% loan would mean the 5.5% rate is the first year rate, and the loan will increase once a year
10/1 ARM: 6.40% today vs. 6.32% last week
7/1 ARM: 6.20% today vs. 6.19% last week
5/1 ARM: 6.04% today vs. 6.01% last week
- BUY DOWN: Ask a lender how much does it cost to buy down the loan by 1% for each $100,000. The answer might be: a 7% $300,000 loan could be reduced by one half of one per cent to 6.5% for 1.5 points. One point is 1% of the loan. Therefore for $4,500 ($300,000 * 1.5 * 1%), is added to your closing costs. Payments drop from $1966 to $1,896. Over the life of the loan you save $25,200 on the $4,500 you paid in in extra points. The rate of return on the $4,500 is roughly the same as the interest rate on the loan
- GEM: Growing Equity Mortgage: This is a loan suited for the upwardly mobile professional. The VA, FHA and Ginnie Mae will back growing equity mortgages. Ask you lender if their bank or sources provided GEM’s. These are mortgages that start a bit lower and end a bit higher but feature a lower payment in the early years.
- PRICE ADJUSTMENTS: With higher rates there are fewer buyers. Buyer’s can drive the deal in some situations. The buyer’s representative might be in a position to drive the price lower. For each $50,000 in lowered price, the monthly payment likely drops by $300 per month. For the seller’s agent, this is a difficult situation and must be a seller’s decision based on outstanding loan, motivation, timing and lifestyle to name a few. But, for the seller, there are non-price features like, shrewd negotiating, setting expectations, or asking what is buyer’s perfect closing date, perhaps, negotiating the furnishings, or offering a home shield insurance plan.
- Second Mortgage: If pushed to a limit, perhaps a seller can take back the difference as a secured second mortgage with a term of say 5, 7 or ten years and could be minimal monthly payments. It could be at a lower rate but structured in such a way that it is due upon sale or due as a bullet maturity.
- Negotiating Rapport: You have a job to do. The seller’s agent must sell and the buyer’s agent must buy. That is our job. Rapport, getting along, explaining what it will take to satisfy the parties. Communications seller’s agent to seller; buyer’s agent to buyer, and agent to agent. Ask the bank how they can help. Ask if there are special arrangements that can be made. Are there non price items, timing, closing date, furniture, home shield type policies. Sometimes it is as simple as keep the rapport and conversation alive.
- Be sympathetic and compassionate with your client. These are tough times. “I understand”; I have been through this myself; “I know how you must feel”. “I am here to counsel and help” Use a net sheet to explain your best estimate of net proceeds, or net cash required. Perhaps the difference can be put in perspective. It is 6 months wages. It is 4% of the value of the home. The mortgage interest is deductible so might reduce your taxes.
- Refinance: Refinance when rates are lower. Maybe we can consider this a short term problem. We can not forecast interest rates but rates do go up and rates do go down. If they go down, you can refinance.