ARM vs. FIXED FROM THE PERSPECTIVE OF A
REAL ESTATE AGENT
ARM vs. FIXED?? IT MAY DEPEND ON THE REAL ESTATE MARKET
We love Loan Officers and Mortgage Lenders. They do wonderful things for our buyers. They arrange for the loan of LOTS and LOTS of money.
If you’re monitoring the Carnival of Content - Loan Officers/Mortgage Lenders managed by Rich Jacobson, you’ve probably read a number of articles by some of the “best of the best” ActiveRain loan officers and mortgage lenders. I certainly have. In fact, I looked forward to this part of the Carnival of Content as eagerly as I did the first round which was for real estate practitioners. I’m learning from all of the contest submissions.
REAL ESTATE AGENTS CAN’T WORK IN THE DARK
The subject of the contest was “ARM vs. Fixed Rate Mortgage Loans” and I am always eager to gain insight into the mortgage side of our business. Having a basic knowledge of home financing is important for real estate agents when counseling home buyers, which many agents do on a daily basis. I don’t play loan officer and I’m quick to call or e-mail a loan officer when the need arises. However, my Internet advertising generates a lot of phone calls from home buyers and, if the conversation gets to the matter of financing, I need to know the basics. In years past, the ARM was always the recommended choice because of the buying power it gives our buyers. It makes little sense to pay for long terms when a family is only going to be in a home for 3-4 years. I know the buyer’s father told them to get a “safe” 30 years fixed, but it would cost them a tremendous amount of interest over the years. My market area is VERY transient and the average loan is paid off in about 2/1 2 hears. So, I need to be able to qualify folks for long AND short term loans.
Loan officers tell me, “Lenn, Call me and I’ll qualify the buyers for you”. Well, that doesn’t work because the buyer is on the phone and I need to decide whether to send the prospective buyer to an agent to look for a home NOW. If a buyer calls about a specific home or community, I like to verify that they are qualified for a home in that price range. Agents shouldn’t be showing homes to prospective buyers who are not qualified for that price range. The qualifying procedure that I use is easy. I use the monthly gross income to figure about 30% of their income at 7% (this week), factor in taxes, hazard, HOA or condo fees, insurance for the county in which the buyers is interested and sometimes, figure an estimated interest tax deduction. The interest tax deduction is still a major incentive for home buyers in buy vs. rent comparisons. Jason Price points out the importance of the term of the loan. How long do they think they will own this home? We have military buyers in our area for whom it makes little sense for them to buy.
By the time I qualify a buyer, I have not only determined their qualifying price range, but have also gained their confidence and we are on our way to selling that buyer a home. So, the matter of “ARM vs. Fixed Rate” is a matter of great interest to me when speaking with home buyers. As Matthew Blum points out, there are over 100 loan programs available to every borrower from any loan officer. As a real estate broker working with home buyers, I don’t need to know the intricacies of 100 loan programs. I do, however, often need to be able to qualify home buyers to determine whether they have sufficient income to even be in the market.
SHOULD BUYERS BE LOOKING AT THIS? OR SHOULD THEY TRY TO BUY THIS?
THE MEDIA WILL ALWAYS FOCUS ON THE BAD NEWS
One of the reasons there is so much media attention to loan instruments these days is the problems associated with the sub-prime market. Along with the attention to sub-prime loans came a focus on option arms, teaser rates, etc. The dramatic increase in the number of real estate licensees, 1,300,000 members of the National Association of Realtors was matched by a concomitant number of mortgage brokers and loan officers.
LICENSE LAW GIVES THE CONSUMER THE RIGHT TO SELECT THEIR MORTGAGE COMPANY
If a consumer contacts us and does not already have a relationship with a loan officer, we refer them to loan officers that we have had good success in closing on time with fair rates and who communicate with the buyer and agent. That’s how we get to the settlement table. However, with the Internet, that has changed. Often, buyers already have a relationship with a loan officer, mortgage company or broker before they contact us. We can’t interfere with that relationship without being accused of benefiting from a lender referral. I don’t benefit from a lender referral except to get the job done for my buyer. But, buyers don’t always know that and we have to walk softly when meeting new buyers until we have their trust and confidence and then, if we know our business, can advise buyers about different loan officers. Agents risk losing the confidence of buyers if the agent insists that the buyer, already “pre-approved”, switch lenders. We have had loan officers ”suggest” that the agent is going to benefit if the buyer changes to a suggested mortgage company. That can be true if the agent is with a real estate company that also owns a mortgage company. But, the suspicion that the agent is benefiting from a mortgage officer referral, while there may be no truth to the accusation, is always a risk. Sometimes agents don’t have the opportunity to refer a buyer to a known and trusted loan officer until the buyer has had a loan denied by the mortgage company they selected before meeting the agent.
THEY QUOTED THE BEST RATE, BUT WILL THE CONTRACT CLOSE?
The consumer wants to interview real estate agents about how long we’ve been in business, now many homes we sell, etc., etc. The consumer is looking for experienced real estate agents. But, most consumers assume that loan officers are qualified, are knowledgeable and are experienced. When the consumer seeks the services of a mortgage company, they usually have one question, “What are your rates?”. Or, “What am I qualified to buy?”. What’s missing here? Are all mortgage loan officers experienced? Do they all know their business? Do they always close on time?
I spoke with an agent last evening who had to cancel a closing for Monday because the loan broker that the consumer insisted on using because he gave her a good rate, now can’t close unless the buyer comes up with $6,000 more closing money by Monday. They won’t return the agent’s phone calls and, in fact, have refused to speak with the agent from the beginning. The agent knew that the loan quoted for that buyer was not a fair rate, never could get a GFE, and yet, the buyer insisted on sticking with the mortgage company. Unfortunately, the loan officer turned out to be, in the words of Brian Brady, a mortgage hack. Everyone did their job but the mortgage lender.
THE NEWS WASN’T ALL BAD
I believe that we need to understand the relationship between mortgage types and the real estate market. I don’t believe that mortgage loans operate in a vacuum. While the real estate market is quite sensitive to mortgage rates, mortgage loan types are also sensitive to real estate prices. When rates go down and more buyers qualify to buy, the inventory of homes for sale goes down and real estate prices go up. This occurred following the September 11, 2001 attack on the World Trade Center. I believe that the Federal Reserve dramatically reduced rates to help Wall Street and the banking system and businesses, but it also benefited many home buyers. Lower interest rates, once they filtered down to mortgage rates, made homes available to buyers that previously would have been considered out of their price range.
Rent vs. Buy?
For most home buyers, the solution to high home prices is not “rent vs. buy”, it could also be “buy a lower price home”. Bryan Brady explains the importance of liquidity. If the home buyer has little liquidity, can only qualify for the McMansion with an exotic loan, or an arm with a higher margin, perhaps the solution is another home type or another community. Perhaps the solution is to consider buying a lower priced home. Perhaps a town home is a better solution. Perhaps a resale rather than new will work better. Perhaps new, when the builder incentives are factored in is a better selection in certain markets than resales. Perhaps they can travel a bit farther from work and get to a more rural area where prices are lower. Real estate agents who know their market can find better solutions to the high price of real estate than renting. With home ownership, the buyer will have the mortgage interest tax deduction, be able to leverage their investment and, the one thing they can’t get renting, a place to call MY HOME.
Courtesy: Homefinders.com
Lenn Harley, Broker, Homefinders.com, 800-711-7988, Serving home buyers in Maryland and Northern Virginia
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