By Jake Perry (NMLS 231682), Fairway Independent Mortgage Corporation, Member of CCAR's REALTOR®/Lender Committee
Mortgage interest rates and rate changes are a huge topic of conversation with consumers who are actively looking for a new home, as well as those considering looking for a home. The rate on a mortgage loan impacts monthly payment, but is it the most important item in choosing the right mortgage? Are there borrower strategies we can use that can have a bigger financial impact than rate?
“Rates were this much higher back then,” is a common refrain among REALTORS® and Lenders, and it is true that historically today’s rates are lower than in the past. The 40-year average of interest rates is in the mid 7% range. And, in the early 1980’s, mortgage rates were above 10% into the teens.
However, since the 2008 mortgage meltdown and real estate downturn, the Federal Reserve lowered the federal funds rate, which in turn lowered mortgage rates. Rates dropped and stayed low until 2017. Since then, rates have trended upwards. Within the most recent weeks, the Fed has commented that they may not continue raising the fed rate. This change in the fed stance has brought rates down slightly.
With the constantly changing landscape of interest rates, what is the best advice we can give our clients? Are there other strategies and programs borrowers should be aware of relevant to rates?
Why is rate so important to clients when there are so many more factors that go in to the mortgage?
The answer is that for many consumers, rates have become the go-to measure of the total quality of a mortgage. Nothing could be further from the truth. Although rate is important, correctly qualifying, executing on required time lines, and customizing mortgage strategies that fit the borrower’s long and short term needs is far more important.
As real estate professionals, we have a fiduciary and ethical responsibility to educate clients on the rate topic and differences in mortgage lenders.
The mortgage process is more complex and detailed than many consumers realize. Hundreds of items related to a borrower’s income, credit, assets and property are checked. Professional loan officers then take this information combined with a borrower’s short and long term goals and customize a loan option specific to them. Borrowers often fail to realize that every single mortgage is different and that a mortgage can be customized to their exact situation. Unfortunately, some lenders also incorrectly qualify a consumer, and a borrower going under contract after being incorrectly qualified can cost thousands of dollars immediately due to loss of earnest money and other expenses. Furthermore, purchase contracts dictate specific timelines that must be met. If these timelines are not met by the buyer’s lender, it can lead to losses for the buyer.
Customizing a mortgage strategy specific to the client is crucial part of the mortgage process.
Professional loan officers should listen and dialogue in order to identify the borrower’s goals, hopes and dreams. If a life event is going to happen, what is the best mortgage strategy to fit the client’s needs? These strategies can include lender-paid closing costs, an adjustable rate mortgage, lender-paid mortgage insurance, and the seller buy down strategy.
A borrower that is going to be in the house for a shorter period of time may want to consider lender-paid closing costs and taking a higher rate, because of the time horizon the borrower has the home, a higher rate and lower costs can be less expensive.
ARM- Adjustable Rate Mortgages, these mortgages have a stigma from the 2000’s as being a bad deal for the client. However, the modern ARM loan is not the same as the 2000’s version. Modern ARM’s don’t have prepayment penalties and have longer fixed rates. Their rates can be lower than fixed. If a borrower is sure that they will have the loan shorter than the ARM period, it can be a good choice.
Lender paid mortgage insurance or no PMI loans can be a good option for someone wanting the lowest possible payment, and may not be in the home for a long time period.
A long term strategy is the seller buy down strategy. In this strategy a seller pays for the buyer’s rate buy down to the lowest possible rate. The monthly payment with this strategy can be much lower than it would be in the sales price were reduced. This strategy can save the borrower in short and long term.
What does this all mean and what is the best fiduciary advice we can give clients?
We know that many consumers have been told that rates are the only factor that matters. REALTORS® and Lenders must educate borrowers that choosing a Lender is more than just choosing a rate. Rate does not equate to best! Our dictate is to question our borrowers on their hopes, dreams and goals, then make them aware of other important factors in a mortgage. A professional mortgage planner will then customize an approach specific their goals. This educating professional approach leads to better borrower experience, financial benefits, and in turn additional referral opportunities for the REALTOR® and Lender.
The CCAR REALTOR®/Lender Committee meets the second Tuesday of every month immediately following the Plano Business Development Meeting (approximately 1 p.m.). We invite you to join us at an upcoming meeting.
For these and other questions about lending, contact the REALTOR®/Lender Committee at RealtorLender@ccar.net.