As this was written, we were mere hours from a Federal Open Market Committee (FOMC) decision wherein “the Fed” would raise short-term rates another .25%, and provide some insight into the trajectory of rates into 2019 and beyond. Barring something unpredictable on the financial markets, or barring the realization of the permabears’ scattershot predictions of impending doom, most economists feel that we are going to continue down a path of higher interest rates, both at the Fed funds level and spilling over to longer-term rates like mortgages.
What is the home buyer to do?
Well first, we’re going to dispel the “don’t worry, be happy” attitude some would encourage you to otherwise take. After all, back in the day when West End girls just wanted to have fun and Tommy and Gina were living on a prayer, rates were 11%, 14% even 18%! So even if we soon seen 30-year fixed rates crossing the psychological barrier of 5% it ought to be no reason for doves to cry, right? Papa may preach this logic but I’m sorry, it doesn’t hold for today’s buyers. They’ve seen home loan rates in the 3’s and 4’s and they understand how a rate push higher, coupled with increasing home prices, has eroded their affordability.
Fortunately, we don’t have to reach back to the “I Love the ’80’s” time machine to pull out an oldie but goodie. No, we can go no further than the interested party contribution or “IPC.” Basically, we’re talking about a credit. It can come from the seller or it can come from either real estate agent, or any combination above. But in the end, the purpose is to use or create revenue in the transaction and apply it to “buying down” the borrower’s interest rate. The classic example would have a buyer who is in negotiation to purchase a home and who has been quoted a rate of 5.000%. The buyer starts to get “cold feet” at this level. His Realtor steps in and structures the offer or counter offer to enable the buyer to get a credit of $4000, or 1% of a loan amount of $400K. The buyer’s Realtor consults the mortgage lender to determine what the impact of paying discount points would have on her client’s rate and it results, in our hypothetical case, in a reduction of a quarter percent, bringing the Note rate down to 4.75%. The buyer, in turn, benefits from the lower rate not only at the water cooler by way of bragging rights, but also by preserving the qualifying debt ratio and by saving interest over the lifespan of the loan. The backdrop to this credit also happens to be the significance, or lack thereof, of a price reduction on the home of the same amount. Often, such a small change would not “move the needle” if applied to the home’s price ($500K to $496K), but can go quite far if applied to the buyer’s mortgage rate.
Of course, credits are not free. It’s not money for nothing, but it is a tool in the toolbox for all involved in the negotiation. We’re here to help structure these transactions, to provide a better understanding of the math in play, and when it comes to a likely rise in rates, we’re here to help our clients beat it.
I want my MTV,
Vice President of Mortgage Lending
Cell/Text: 415-367-5959 Fax: 415-366-1590
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