Stubbornly high interest rates are complicating the real estate market, but the situation is far from over. When people need a home, they buy a home regardless of price, mortgage rates, or market conditions. Waiting for better terms is often not an option.
This situation had many implications. For example, 56% of first-time homebuyers said they felt pressured to buy sooner than expected due to fears of an impending recession. This is leading to an increase in homebuyer remorse.
Another impact is a reluctance to sell among homeowners whose home purchase rate is less than 4%. Many of those homeowners now feel trapped in the “golden handcuffs” of historically cheap mortgages.
However, some homeowners are forced to move due to a new job or change in family obligations. It can be difficult for agents to work with sellers who are reluctant to exchange a sub-4% mortgage for a 2x mortgage.
8 tips for working with fixed sellers
1. Search for lower interest rates
Today’s mortgage rates may seem scary, but customers can lower the interest rate on their next mortgage with a buydown.
For cash upfront, buyers can purchase points equal to 1% of the loan amount to “buy out” their mortgage interest rate and permanently reduce their monthly mortgage payment. Typically, each point lowers your mortgage interest rate by one-quarter of a percentage point.
If a customer owes $300,000, the cost of one point is $3,000. Two points costs $6,000 and reduces your mortgage rate by 0.5 percent. Borrowers can purchase 4 points for $12,000 and lower their interest rate by 1 percentage point.
Lenders typically limit buyers to 4 points or less, but getting a full 1 percent reduction on your mortgage can lead to significant savings. If customers have cash available upfront in addition to their down payment, they can cushion the shock of rising mortgage rates.
2. Set expectations
Buyers faced with rising mortgage rates are often psychologically prepared for higher monthly payments, but one common shock is a reduction in purchasing power. Buyers who purchased larger homes when mortgage rates were 2% or 3% may not realize that they could get a significantly smaller home for the same budget.
Explain to your customers how much home they can buy and show them examples before they take a tour. When they see their buying power in action for the first time on the first day of an open house, it’s very hard to overcome the shock and disappointment.
3. Listen and empathize
Listening to the customer is always one of the first responsibilities of a real estate agent, but this is doubly true when dealing with reluctant sellers. Listen to their concerns and regrets, acknowledge the tough situation, reassure them that you’re doing your best, and generally just help them process their emotions. Once that’s done, you’ll know you’re ready to migrate.
4. Check out available mortgage loans
An assumable mortgage allows a buyer to assume the seller’s existing loan and inherit its lower interest rate. This process has traditionally been slow and expensive, often requiring a down payment of 35 percent or more to cover the seller’s equity.
However, the market is catching up with new financing solutions that offer faster closings, down payment assistance, and mixed rate options that combine scheduled interest rates with secondary market rate loans. For flexible sellers, forgoing interest rates below 4% can be much less painful with an assumable mortgage.
5. Highlight the positives
In many cases, sellers who leave low-interest mortgages are doing so because they have to. Maybe you want to get a new job in a new city or move closer to a new grandchild. By reframing one’s situation in relation to new life goals, sellers can be freed from great resistance and regret.
You might feel a lot better knowing that you’re not giving up an affordable mortgage in exchange for a great new job or family opportunity.
6. Suggest a recast
One way to soften the blow of taking out a high-interest mortgage is to restructure your loan with the proceeds from a previous home sale. Recasting involves applying a lump sum to your loan principal and reducing your monthly payments based on that principal.
For example, if a buyer sells their current home and takes out a 3% loan for a profit of $150,000, they can take that money and refinance into a new 6.5% loan. A $400,000 loan at 6.5% is reduced to $250,000, significantly lowering your monthly mortgage payment. Although interest rates are still relatively high, this is a great way to ease your financial burden.
7. Continue low interest loans and increase rental income
Depending on the seller’s situation, you may be able to keep your low interest rate mortgage and purchase a second mortgage that is nearly as affordable.
If they have flexibility regarding their relocation, some sellers may choose to keep their current loan, convert the property to a rental property, or take out a low-interest government-backed mortgage on their new home. For example, FHA loans have significantly lower interest rates than market rate loans and require little down payment.
If their current home is on the active rental market, there’s a good chance they can earn enough to cover their mortgage payments. If this arrangement is financially viable for them, this is a way to maintain some flexibility and be able to maintain a low interest rate mortgage.
8. Wait for it to come off the market
If a customer’s circumstances do not force a move and today’s high mortgage rates are simply unacceptable, one option is to sell the home and wait for interest rates to come down before renting.
The outlook for interest rates to fall significantly for at least a year is not optimistic, especially since the Middle East conflict will push interest rates higher in the short term. Today’s rising mortgage rates and home prices make renting a financially sound option in many markets.
May is Inman’s seventh annual Agent Appreciation Month. Find profiles of top producers, their thoughts on the state of the industry, and concrete takeaways you can implement in your career today. Additionally, the prestigious Real Estate Future Leader Award is back.
Luke Babich is CEO of Clever Real Estate in St. Louis. Connect with him on Facebook or Twitter.
