If you’ve been in the real estate industry for 12 years or less, you probably think of a mortgage as a 30-year fixed loan with 20% down and a low rate. That’s been the standard-issue loan for more than a decade. Now that rates are inching up (still not the end of the housing world as you know it), it’s time to brush up on some options to keep payments reasonable.
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2 Facts first, then 3 strategies to create an acceptable payment.
Fact #1: Buying a home in today’s market makes more sense than waiting…even with the higher rates. At an interest rate of 5%, the payment on a $500k purchase, financing $400k after putting 20% down will cost you $2430/month or $29,000 per year.
Here’s where inflation / appreciation is on your side… After just one year, using a now-conservative estimate of 16% ‘appreciation’, that equals $80,000 in equity built.
Take away your $29,000 of payments and you’re ahead financially by $51,000. That’s after just one year.
If appreciation slows to 7% yearly, you’re still breaking even on your payments versus your growth in equity.
Fact #2: If you believe that buyers are always required or expected to put 20% down, you’d be wrong. According to the National Association of Realtors, in 2021, the average down payment was 12%. Buyers under 30 years old averaged 6%. There are low or no down payment loans, and you can get a 3% down conventional loan if your credit and ratios are strong enough. Veterans usually put down 0%.
Why does that matter? Because using some cash toward rate locks, buydowns and other strategies can lock in a lower rate, thus a lower payment. Wait…what? How do you do such things?
Quiz:
Please choose one answer:
1) I am ready to join EXP Realty.
2) I am interested in EXP Realty and need more info.
3) I am not interested in EXP Realty.
Key:
* If you answered “#1” congratulations. You are about to join the fastest-growing real estate company in the world. Tim and Julie Harris are inviting you to join them at EXP Realty. Text Tim directly for the next steps: 512-758-0206. (text only please)
* If you answered “#2” please watch the videos and check out the other intel on this site. http://whylibertas.com/harris .
* If you answered ‘#3’ no worries. You will want to check out whylibertas.com/harris so you can at least know what EXP Realty is and why so many agents are moving to EXP.
Knowledge = Confidence, Ignorance = Fear. Update your mortgage education so you can think out of the box and continue to meet or exceed your own production goals. The more people you know how to help, the better you’ll do in today’s changing market.
Secret: Knowing about different types of loans for different types of borrowers doesn’t just help you with YOUR buyers… you may find yourself finding a solution for buyers in contract on your listings. Deals are falling apart right now because no one is suggesting alternatives to the 30 year fixed. Buyers, agents and lenders are focusing on higher payments instead of different types of loans.
3 Strategies to create the right loan situation.
1 – Lock-in today’s interest rates by purchasing a rate extension.
What is a rate lock and how do you extend it?
The rate lock is your lender’s offer to guarantee the interest rate of your mortgage loan for a specified period of time. They may charge an extra fee or include the cost of a rate lock in the loan (rolling it into the loan and allowing you to finance the fee).
You need the rate to be locked from initial loan approval, through processing, underwriting, and closing. With rates inching up, it may be wise to pay a little extra to extend the rate lock a bit longer. This is especially important if you have a longer closing time, are waiting on new construction to complete, or are in a rising rate environment like we’ve been in for the past 60 days.
You want to have a ‘float down’ option so that if rates go LOWER, you get that advantage as well.
What’s it cost to lock it in?
The fees vary and are dependent on the lock-in period you want. Fees are measured in basis points, typically 0.25% of the total loan value (not the purchase price). So a 0.25% rate lock fee on a $200,000 loan would be $500.
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Is that really worth doing?
Let’s take this example: A $300,000 home financed for 30 years at 4% with 20% down will have the payment increase $44/month if the interest rate goes up to .25%. That’s $2600 more after 5 years of living in that home.
Let’s say you spend $600, or 0.25% to lock in the lower rate. You just saved $2000.
When would this NOT make sense?
– If you’re flipping out of the house quickly.
– If the extra $44/month isn’t enough of an increase to really affect the borrower’s cash flow
– If you can get a different type of loan and accomplish the same low rate without spending money on a rate lock.
2 – Use some cash to buy down the interest rate, thus reducing the monthly payment. This is also known as ‘paying points’. Sometimes lenders require a borrower to do so, but you can also do it voluntarily as a strategy to keep the payment low. This is known as ‘buying down the rate’.
How much does one mortgage point reduce the interest rate?
When you pay 1% of the mortgage amount, the lender will typically reduce the interest rate by 0.25%. YOU decide how much or how little you wish to pay when ‘buying down’ your points.
The effect of a paid discount point is different with different lenders, the type of loan, and the borrower’s qualifications.
Sometimes spending a point or two makes all the difference in the payment you’re trying to achieve. It makes more sense the longer you’re going to be in the house.
NerdWallet.com has some good charts to compare what you get with a typical buy down. MortgageCalculator.org is another good tool to adjust rates and see what kind of payment you can achieve.
Remember that all of this is still subject to the particular qualifications of a borrower. Credit, job history, income and ratios are of course still a factor. A borrower might be able to achieve the same goal by improving their credit by 20 points. Experian.com is a great resource to understand credit and how to improve it.
3 – Utilize an Adjustable Rate Mortgage (ARM) to keep payments low for a few years. There is an initial term of the loan which has a lower rate, thus lower payments. You can do a 3, 5, 7, or 10-year loan which adjusts to the prevailing rate at the end of the initial time frame.
Adjustable Rate Mortgages are a good choice if:
a) You plan to move before the end of the introductory fixed, low rate period and aren’t concerned about future rate increases.
b) You want an initial period of a lower rate, lower payment, and will either move or refinance before the rate adjusts up.
Bottom line?
1 – Some buyers will simply be priced out of the market, no matter what you do. Be a listing agent and use the strategies we shared to ‘save’ deals when necessary, to help your listing clients who are also buyers, etc.
2 – Not all borrowers are the same, not all loan products are the same. Lenders sometimes push buyers into products that will pay them the best, and if your buyers don’t ask the right questions, they may not be getting the best loan for their situation.
3 – For most buyers, locking in a home right now is more important than arguing over a couple of hundred dollars in payment. Inflation/appreciation should perhaps be taken MORE seriously because waiting to be a homeowner is literally costing them money… at least for now.
4 – How do you learn more about this? Premier Coaching.
Knowledge = Confidence and Ignorance = Fear. Which do you choose? Allow us to educate you, motivate you and get you into action.
