Stubbornly high interest rates have complicated the real estate market, but they haven’t brought it to a halt. When people need a house, they buy a house — regardless of price, mortgage rates, or market conditions. In many cases, there’s no option to wait for a better deal.
This state of affairs has had a number of consequences. For example, 56 percent of first-time homebuyers said they felt pressured to buy sooner than they wanted to because of fears of an imminent economic downturn. That’s led to a rise in home buyer regret.
Another consequence has been a reluctance to sell among homeowners with a sub-4 percent rate. Many of those homeowners now feel trapped by the “golden handcuffs” of a historically cheap mortgage.
However, some of those homeowners have no choice but to move because of a new job or changing family obligations. Working with a seller who’s reluctant to exchange a sub-4 percent mortgage for one that could be twice as high can be challenging for an agent.
8 tips for working with locked-in sellers
1. Explore rate buydowns
Today’s mortgage rates can seem scary, but your clients can lower the rate on their next mortgage with buydowns.
For cash up front, buyers can “buy down” their mortgage rate and permanently reduce their monthly mortgage payment by purchasing points for 1 percent of the value of their loan. Each point usually lowers their mortgage rate by a quarter of a percentage.
If your clients are borrowing $300,000, one point will cost $3,000. Two points, which would cost $6,000, would lower their mortgage rate by half a percent. For $12,000, borrowers could purchase four points and lower their rate by a full percentage point.
Lenders typically limit buyers to four points or fewer, but reducing a mortgage by a full 1 percent can translate to significant savings. If your clients can come up with the cash up front, on top of their down payment, it can help ease the shock of a higher mortgage rate.
2. Set expectations
Buyers confronted with higher mortgage rates are often psychologically prepared for a higher monthly payment, but one common shock is the erosion of their purchasing power. A buyer who purchased a large house when mortgage rates were at 2 percent or 3 percent may not realize that same budget will now get them a significantly smaller home.
Before your clients go on tours, explain how much house they can afford and show them examples. If the first time they see their purchasing power demonstrated is on their first day of open houses, it’s very difficult to counteract that shock and disappointment.
3. Listen and empathize
Listening to clients is always one of the first responsibilities of a real estate agent, but this is doubly true when you’re dealing with reluctant sellers. Listen to their concerns and regrets, acknowledge the tough circumstances, assure them they’re doing the best they can and generally just help them process their emotions. Once they’ve done that, you’ll likely find that they’re ready to make the transition.
4. Explore assumable mortgages
Assumable mortgages let buyers take on a seller’s existing loan, inheriting their lower rate. The process has traditionally been slow and costly, often requiring a down payment of 35 percent or more to cover the seller’s equity.
But the market is catching up with newer financing solutions offering faster closings, down payment assistance and blended rate options that combine the assumed rate with a secondary market-rate loan. For sellers with flexibility, an assumable mortgage could make giving up that sub-4 percent rate far less painful.
5. Accentuate the positives
In many cases, sellers who are leaving behind low-rate mortgages are doing so because they have to. Maybe they got a new job in a new city or want to move closer to a new grandchild. Reframing their circumstance in relation to their new life goals can release the seller from a lot of reluctance and regret.
Help them understand that they’re not giving up an affordable mortgage as much as they’re trading it for a great new job or family opportunities, and they might feel a lot better about it.
6. Pitch a recast
One way to soften the blow of taking on a higher-interest mortgage is to recast the loan with the proceeds from a previous home sale. A recast takes a lump sum and puts it toward the principal of a loan, reducing the monthly payments based on that principal.
For example, if your buyer sells their present home, financed at 3 percent, and pockets $150,000 in profit, they can take that money and recast their new 6.5 percent loan. That 6.5 percent loan for $400,000 can then be reduced to $250,000, significantly bringing down their monthly mortgage payment. Although their interest rate will still be relatively high, this is a great way to reduce their financial burden.
7. Keep the low-rate loan, build rental income
Depending on sellers’ circumstances, they might be able to keep their low-interest mortgage while getting a second one that’s nearly as affordable.
If they have flexibility regarding where they can move, some sellers opt to keep their current loan, convert their property into a rental and try to get a low-interest government-backed mortgage on their new home. For example, an FHA loan comes with an interest rate that’s significantly lower than a market-rate loan and requires very little money down.
If their present home is in a hot rental market, it could very well bring in enough to cover the mortgage payment and then some. If this arrangement is financially feasible for them, this is a way to preserve some flexibility and allow them to hold on to their low-rate mortgage.
8. Wait out the market
If your clients’ circumstances aren’t forcing them to move and they find today’s higher mortgage rates simply unacceptable, one option they have is to sell and then rent a home while waiting for rates to come down.
Forecasters aren’t optimistic that rates will meaningfully fall for at least a year, especially as conflict in the Middle East pushes them back up in the short term. With today’s elevated mortgage rates and home prices, renting is a financially sound choice in many markets.
May marks Inman’s seventh annual Agent Appreciation Month. Look for profiles of top producers, opinions on the current state of the industry and tangible takeaways you can implement in your career today. Plus, the prestigious Future Leaders of Real Estate Awards return.
Luke Babich is the CEO of Clever Real Estate in St. Louis. Connect with him on Facebook or Twitter.