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As a new real estate agent just 12 months into my career in real estate, I am low on the totem pole at Keller Williams Realty Falls Church, Virginia. That means I pursue some leads that more established agents can’t be bothered with, such as uncertain first-time buyers.
In my short time in the business, I have learned that young people need someone to hold their hand and explain the process. The first home is the most difficult because it’s such a big purchase.
For many first-time buyers I work with, the only other thing they have ever bought in their life is a car. This is the first time they have bought something as big and expensive as a house.
The sheer size of the price tag and length of the mortgage puts them in shock — even though logically, they know that their mortgage payments may work out to be lower than their rent.
When they sell in five to seven years, they will be making more money, and they’ll have the option of renting their first purchase out or selling it and buying something else.
Saving up to pay higher rates
The big discussion I have with uncertain buyers these days is about interest rates. Sometimes they think they can wait before buying and save for a bigger home, but sometimes what you’re really saving for is higher interest rates.
I firmly believe that most first-time buyers — for whom every dollar counts — should act now before rates go up. Of course, conditions in my local market may be different than in yours.
Take a couple that I first started working with in November. The wife of the pair told me, “I think we’re looking to buy something.” But when we looked, they were disheartened by what they saw in their price range. They could not afford the places they liked and did not like the places they could afford.
So this couple decided to keep saving and renting until they had more money for a down payment. Last month, I reached out to them again to tell them about some single-family homes that had come onto the market. And now they expect to be out of their rental and into their first home by the end of April.
Here’s what they told me: “Our goal is to buy our first home, not our dream home. We feel like we are throwing our money away in rent. Interest rates have already gone up since we first started looking in November, and we want to lock in a rate before they go up much more.”
They are right, most observers expect rates to go up this year. I have read that in the past 40 years, we have seen the 30-year fixed mortgage interest rate hit a record high of 18.45 percent in October 1981 and a record low of 3.35 percent in December 2012.
Although no one expects the rates to hit the high teens in the near future, industry experts are confident that the rates will rise higher than the average 4.4 percent buyers have become accustomed to over the past decade.
As my mentor, Keller Williams Realty Falls Church agent Crystal Street, has pointed out, buyers who hope to achieve a lower monthly payment should buy sooner. For young buyers who are already financially stretched, having to pay as little as $100 more a month on their mortgage can be a deal breaker.
Help first-time buyers understand mortgage rates
Here are a few of the ways I approach the issue of mortgage rates with first-time buyers.
1. Help buyers find the right mortgage broker
I counsel clients to find a lender who will work with — and for — them. I tell them, “Don’t settle for the first mortgage broker you find if you don’t find him/her helpful.”
A lender can help buyers by finding ways to reduce the down payment with a lender credit and a higher rate, or he or she can explain one’s options for obtaining a down payment as a gift, by pulling money from a retirement account, etc.
A lender should also help buyers understand the maximum home price that will fit their monthly payment goals.
2. Communicate often
Keep open communications with local lenders, and stay on top of interest rate changes. This is important in our environment of rising rates. I always want to know what my buyers are likely to be able to afford and what their home is going to cost them — on a monthly basis and over the lifetime of the loan.
3. Learn about first-time homebuyer programs
I ask a local, respected mortgage lender to keep me informed of the special programs for first-time homebuyers. For example, my state of Virginia offers programs that help buyers with down payments that allow them to afford to purchase.
4. Host seminars
Because interest rates are such an important topic right now, I’m working with the mortgage lender to do seminars at local companies where lots of young people work. They come, have lunch and learn. I organized similar events for years in my prior career in corporate sales, so this is natural for me.
5. Set expectations
For first-time buyers, I remember to tell them that, typically, their first mortgage payment is not due for 45 days after they close. They can count on saving that whole month of rent. This helps them to plan for staying cash-flow positive during the month they buy their home. Lots of times they can also get seller support for the closing cost.
6. Inform as you nurture
Because I know the monthly costs of both rents and loans for typical homes in my farm, and because I also have a pool of people from open houses who said they might be waiting for next year, I use the act of sharing this information as another reason to reach out. I also include it in my newsletter.
That’s how I talk with first-time buyers when it comes to mortgage interest rates. If you have your own observations and advice to share, I’d love to hear from you in the comments section below.