Shopping Mortgage Rates

Nobel Prize recipient, Richard Thaler, in his research into seemingly irrational economic behaviors, "found that consumers generally search too little, get confused while evaluating complex alternatives, and are slow to switch from past choices, even if it costs them." "Why are consumers leaving money on the table?"

Based on this behavior, a borrower securing a mortgage might depend on their existing banking relationship or a single referral from a friend or agent rather than shopping multiple lenders.

When shopping for a lower mortgage rate, consider that not all lenders share the same business practices.  Some may lure unsuspecting borrowers to a rate, knowing full well that they cannot deliver on it.  After making a loan application and supplying information necessary for approval, they reveal that the rate is not available for "whatever" reason.

They're counting on the borrower wanting to get into the home because the closing date is near and they'll compromise by accepting the higher than quoted rate.

Shopping for a mortgage rate can result in savings because rates are set by individual lenders.  To get an apples-to-apples comparison, the terms of the mortgage being shopped should be consistent among the lender candidates.

Consumers can make additional savings by not only shopping for better rates but for better terms and fees, which can vary widely among lenders.

The amount of savings can be affected not only by the difference in rates, but the size of the mortgage and the length of time borrowers expect to keep it without refinancing or selling.

• Advertised rates are generally for A++ borrowers and the determination is the lender's based on many factors.  It may be unlikely those rates are offered to you. 
• A recommendation for the best lender from a friend or family member will not necessarily be the best for you.
• Instead of accepting the first offer received, shop for at least three to five offers.
• Your personal bank may be convenient but it may not offer you the best rate, terms, and fees.
• Ask if there is room to negotiate the rate or fees.

Ask your real estate professional for recommendations of several trusted lenders for you to shop a rate, terms, and fees. 

Who Benefits from Selling a Home "As Is"?

A person's decision to sell their home comes with a lot of other decisions causing an owner to stress or procrastinate.  Early in the process, the owner will consider selling the home "As Is" to avoid the looming issues that accompany selling a home.

From a seller's standpoint, "as is" means the buyer will purchase the home in its current condition without asking for any repairs.  While it is convenient for the seller to take this approach, the normal trade out is the property will not result in the highest possible sales price.

Regardless of how the home is sold, the seller is required to disclose all defects which include repair history, condition of systems and appliances, water damage, pest infestation, radon, and other things that affect the value and livability of the home.

From a buyer's point of view, they may think there is something wrong with the home which could result in them avoiding the home completely or making a substantially lower offer to cover not only the known issues but also the unknown ones.

It would be reasonable for a seller to allow a buyer to make inspections to determine what the condition of the home and what kind of expenses they might be faced with.  In some situations, based on provisions in the sales contract, the buyer, after making inspections, may decide not to continue with the contract which could extend the marketing time for the seller by having to find another buyer.

Selling a home "as is" is like wholesaling the property.  A comparison could be trading your car to a dealer when buying a new one.  The dealer will usually give you the best price for the new car but won't offer you a retail price for the trade-in.  If the dealer were to give you a "retail" price for the trade-in, they would probably expect a "retail" price for the new purchase.

Even if the seller doesn't want to go through the effort to make major improvements, they still need to consider things that will ease the buyers' concerns about the home.  These include a thorough cleaning, decluttering, yard cleanup, and repairs on known issues like leaking faucets, lighting, doors, and appliances to name a few examples.

If this path is taken, the cost to the seller will be not realizing the maximum sales price compared to comparable homes that have sold recently in the area that have been updated.

Sellers Pros & Cons	Buyer Pros & Cons
Not spend money to prepare the home	Lower purchase price
Won't maximize proceeds from the sale	Less competition from other buyers
Could sell quickly if priced properly	Financing could be challenging
May take longer to sell	Looking for an opportunity to build sweat equity
Effort finding/negotiating with contractors	Improve the property to your preferences
Investors looking to make a profit	There may be hidden problems
Making decisions on what the public wants

There are companies who will buy your home for cash.  Their ads are very appealing to sellers because it solves their concerns about putting the home on the market.  Realize these companies are not charities but "for profit" who expect to be able to recoup the money paid to you, pay all repairs, renovations, and sales expenses plus make a profit for the risk taken.

As a homeowner, you will always realize more of your equity by approaching it with a risk/reward analysis to determine how to sell it for the highest price with the least expenses.  Your real estate professional will act as a fiduciary to put your best interests ahead of their own.  It is worth the effort before embarking on an "as is" scenario.

A Lesson on Housing from the 80's

Doing nothing may be a lot more costly than doing something.  With rates twice what they were in 2021 and the first half of 2022, many buyers are sitting on the sideline.  For some, it has to do with not being able to afford the home they want at today's mortgage rates and for others, it is not willing to accept that the low rates that were available are not only gone, but may never be available again.

In the late 70's, rates were around 10% and in the early 80's went up to 18%.  Interestingly, many buyers went ahead and purchased at those record level highs and refinanced a few years later when rates came down.  By the end of the decade, prices had continued to increase so that buyers had a significant equity in their home.

Tenants who waited for the rates to go down didn't see savings because the price of homes had gone up.  More importantly, they missed the opportunity to build equity in their home through amortization and appreciation.

If you purchased a $400,000 home today on an FHA loan at 6.3% for 30 years, your total payment with taxes, insurance, and mortgage insurance premium would be about $3,459 a month.

That payment could save you a little bit if you were paying $3,500 for rent.  However, when you consider the monthly appreciation, assuming a 3% annual rate, and the monthly principal reduction due to amortization, the net cost of housing would be $2,229.  You would be paying $1,270 more each month to continue to rent which would amount to over $15,000 in one year alone. 

That loss would be about twice the amount of the down payment to get into the home.  Furthermore, in seven years, at the same 3% appreciation, your $7,500 investment in a down payment would grow to $138,000 in equity in seven years.  If the appreciation is greater than that, the equity would be much more.

You're going to be paying rent to live in a home; you might as well benefit from the equity buildup from amortization and appreciation that is only available to the owner.

The benefit of acting now is that sales are down which are affecting prices, although not dramatically.  When the Fed gets a handle on inflation, and interest rates do moderate some, more buyers will be in the market and supply and demand will again cause prices to rise.  Then, you can refinance to a lower rate but your investment in the home will be at a lower basis.

To run your own numbers, use our Rent vs. Own.  If you have questions, call me and I'll explain how to use it and what to expect for the home you'd like to have.