It was a blessing and a slight curse when Michael Wray and wife Julia finally found their dream house in Connecticut this past summer. They’d been looking for months, during which time mortgage rates were low, inventory lower and homebuyers in a frenzy to win one of the bidding wars that were the norm rather than the exception.
The couple paid $925,000 for a property listed at $819,000, and were happy to do so. But it left them fairly house-poor when it came to choosing a mortgage.
They could have locked into a 30-year fixed-rate for around 5%, but decided on something rarely chosen—a 10-year, interest-only mortgage. They will pay the interest monthly, but none of the principal.
“It saves us money right away,” says Wray. “We’ll have a fixed term for the interest, and if we want to also pay down the principal, we can.”
They can also switch to a fixed-rate mortgage at any point within the 10 years. With the 30-year mortgage now close to 7% due to the Federal Reserve raising interest rates multiple times this year, they’re hoping it moves in the opposite direction in the future.
The choice of an interest-only loan, which most homebuyers likely wouldn’t even know about when fixed-rate mortgage terms are palatable, is at least a consideration, along with other options, for buyers now, and real estate agents should know the details of all of them.
But how deeply should they engage with clients on the topic?
Wray didn’t feel the need to discuss mortgages with their agent, since as a professional financial advisor, he easily deciphered the intricacies of every option. But most clients might want input from their REALTOR®.
“I always start by letting clients know that I am not a lender, and the core of the conversation, i.e., personal finances, are not my business and should be reserved for speaking to a lender,” says Mike Opyd, managing broker/owner of RE/MAX NEXT in Chicago. “I then ask them questions about their main concerns when it comes to getting a loan. Typically, people have similar ones like how much do they need to put down, what happens with student loan debt, and what are the main factors a lender looks for when qualifying a buyer.
“I walk them through the basics, and when I hear more about their situation, I advise them about what options might work, but remind them to make sure they discuss all of it with a lender.”
People looking to buy a house know it’s going to take a down payment and the ability to then make payments to pay off principal and interest. They spend a lot of time with their agent seeing houses, and it’s only natural that the mortgage topic will come up.
Richard La Rue, who oversees 7,000 agents as designated broker for HomeSmart in Phoenix, stresses that mortgage expertise is expected.
“Agents need to really educate themselves,” he says. “I think it’s imperative they know the different products out there in their individual market so they can talk about what could work for their buyer clients. But also, listing agents should know so they can prepare their sellers for a buyer coming in who may want some sort of a mortgage-rate buydown. We’re seeing a lot of that happening.”
La Rue explained that a mortgage-rate buydown gives the homebuyer relief for a few years from the 30-year fixed-rate mortgage terms. So, for example, a 2/1 buydown on a 7% fixed rate would allow the buyer to pay 5% for the first year and 6% for the second.
“Typically, a borrower will ask the seller to pay that, and the cost is usually about 3% of the loan,” he says. “So rather than have price reductions on homes in order to get them sold, sellers are considering that concession.”
That negotiation is between the buyer and seller, not the lender, so agents should be aware of how it works, and even potentially suggest it to clients seeking to save money in some way.
“Even though REALTORS® are not mortgage lenders and do not have every detail about different options, it is our job to advise clients and think creatively to help them achieve their goals,” says Opyd. “A REALTOR® should know about different lending options because many people cannot do a standard 20% down conventional loan.
“We can advise clients about different lending options that can help them purchase when they think they might not be able to. It will still be up to the lender to fully explain to a buyer what their options are, but considering that REALTORS® are usually where the buying process starts, the more educated a REALTOR® is, the better they will be able to serve their clients.”
La Rue notes that it’s unlikely mortgage rates will return to the historical lows of not so long ago, so the days of almost everyone happily signing for a 30- or 15-year fixed-rate are over for now—another reason agents must be able to educate clients on alternatives.
“Interest rates had been so low that lenders could just swoop in and easily do a loan,” he says. “For rates to drop back to 2% would take another catastrophic event like the pandemic or an economic meltdown, something where the Feds are manipulating the interest rate. That was a once-in-a-lifetime thing, and I don’t think I’ll ever see it again.”
An agent being able to convey standard information about how to finance buying a house is a no-brainer, states Opyd, because often, people who start the process of looking at houses have not gotten to the payment basics yet.
“Many people ask me about how the pre-approval process works and if they need to put 20% down,” he says. “This is where being knowledgeable about the lending process and different lending products can serve clients better along with showing them that they are in good hands with someone who knows what they’re doing. This is vital considering buying a home is the biggest financial decision a person is going to make.”
As important as imparting knowledge is being able to reassure clients that it’s never the wrong time to buy a house if they’re ready and able.
Where are mortgage rate numbers going in the future?
“If I had a clear picture of that in my crystal ball, I would have retired 25 years ago,” jokes La Rue. “My opinion of the market doesn’t mean diddly squat. If we look at facts and trends of what has happened in the past, it would be ‘gee, we’re gonna come out of this fine.’
“On the other hand, a 7% rate isn’t that bad in the scheme of things. People are panicking over rates doubling in a year. But looking at the history of mortgage rates over 40 or 50 years, 7% is pretty darn good.
“When I got into the business in 1983, my first sale was at 18 1/2% interest. When we finally saw single-digit interest rates, we were partying. We had a 9.9% interest rate and I remember the excitement of it happening, so it’s all relative. It’s how we frame it to clients.”
