Mortgage Transfers Pick Up as a Way to Beat Rising Rates

The only goal was not to lose money.

When Matthew Kilboy listed the Washington, D.C. condos he and his husband bought in 2017, they said the $529,000-plus they paid was a lucky star dollar due to rising interest rates and a sluggish condo market. accepted to be for.

A similar two-bedroom, two-bath unit in this building recently sold for just under half a million. The $549,000 price they offered in April was basically a wish.

A month later, the couple closed at $565,000. That’s thanks to a little-known amenity that’s growing in popularity as mortgage rates rise. Their unit comes with an estimated 30-year mortgage, and the couple locked in a fixed interest rate of 2.25% after the November 2020 refinancing. The Denver-migrated couple won some high bids in what appears to be a remnant of the real estate market distorted during the coronavirus lockdown by touting that buyers could inherit mortgages. .

“That was the very first sentence of the listing,” said Kilboy, 39, a former Navy nurse. The loan could be passed on to the buyer with the help of the Department of Veterans Affairs, Mr. “Nobody could find interest rates this low, so we pushed hard.”

The Fed may have slowed its rate hikes, but monthly mortgage costs are still more than double what they were 18 months ago. This could deter millions of homeowners who locked in bargain rates during the pandemic from selling their homes, incurring hundreds of dollars in additional borrowing costs each month when buying new homes. There was a significant reduction in the supply of inventory for sale.

With little to sell, house prices have remained stable and are starting to rise again, even as borrowing costs have risen sharply. A common saying among real estate agents and economists is that anyone who secures a mortgage rate of 3% or less owns a valuable asset they don’t want to part with.

But all assets have a price. And now, new investors and real estate executives are effectively trying to sell by transferring years-old mortgage rates to new buyers.

Real estate broker Redfin has seen a surge in listings with comments like Kilboy’s, such as “beautiful home with a notional loan of 3.25%.” While Facebook groups for finding buyers have sprung up, new companies are pitching services that speed up transfers.

“Homeowners with a plausible mortgage have something that many homebuyers want and are willing to pay for,” said Darryl Fairweather, chief economist at Redfin. rice field. “For those who bought when home prices were near peak but mortgage rates were still low, it could be an attractive way out of a regrettable purchase.”

Investors are equally enthusiastic. The euphemistic “creative finance” is a hot topic on sites such as BiggerPockets, a forum where landlords exchange tips on running short-term rentals, buying their first investment property, and more. In books, seminars and YouTube videos, influencers are pitching advice on how to spot distressed homeowners trying to switch low-rate mortgages without the bank knowing. While this strategy is valuable, it is a very risky one, and the title company says it has seen it well.

“It’s just too tempting,” said Scott Trench, CEO of Bigger Pockets, adding that many of these strategies involve additional risks and paperwork that most people are not accustomed to. Added a disclaimer that there are many.

From pedestrians to dangerous people, all of this seems to underscore how regret has frozen the country’s property market. Buyers resent the lack of low-cost mortgages. Sellers are reluctant to cut prices from the peak of the pandemic. Instead of accepting, a determined few are using imagination and fine print to construct a gateway to the cheap era of 2021.

Most US mortgages cannot be underwritten directly. But many of the popular government-backed mortgages, such as mortgages backed by the Federal Housing Administration, the Department of Veterans Affairs, and the Department of Agriculture, typically aren’t, according to Michael Fratantoni, chief economist at the Home Loan Bankers Association. It is said that it corresponds to These loans are frequently used by first-time buyers and account for about a quarter of mortgage balances, according to mortgage technology and data provider Black Knight.

In theory, millions of homeowners with supposedly low-interest mortgages have the valuable perk of being able to sell their homes along with them. Still, realtors say it can be really difficult to transfer. For example, a homeowner who transfers a VA-backed mortgage may not be able to get another similar loan unless she can find a VA-eligible buyer to underwrite her original mortgage.

Or consider a homeowner who has a low-interest mortgage but pays part of it down payment. To underwrite a loan, the buyer must put up a large down payment commensurate with the seller’s capital, which few can afford. do.

Craig O’Boyle wants to build a business that makes it faster and easier to develop hypotheses. Mr. O’Boyle is a real estate agent in Colorado who has been selling homes for 30 years. Now he remembers having to read through doorstop contracts that buyers and sellers could sign with a click of her DocuSign. He said he had read for a long time that certain loans were available for underwriting and that if interest rates spiked, their owners would suddenly realize their debts were worth it. .

“And here comes the change in the interest rate market,” O’Boyle said.

Last year he and his partner Hypothetical solutionis a consulting firm that helps realtors transfer mortgages between sellers and buyers for a processing fee of $1,100 per transaction. In his pitch to his agency, O’Boyle claims fees are less than 3 percent, as are the marble countertops and mountain views.

“If you market this, let’s say you’re competing with the house next door. Your house should sell faster or for a higher price,” he says.

Some form of interest rate coverage is also becoming the norm for the majority of people with traditional non-transferable mortgages. House prices have fallen from their all-time highs in June last year, but haven’t fallen enough to make up for rising mortgage rates and are rising again.

To encourage new loans, mortgage companies have begun selling products that allow borrowers to “buy out” interest rates by paying thousands of dollars at significantly lower interest rates for a year or two. Among the most popular products are2/1 buy downthe borrower pays an interest rate reduction of 2 percentage points in the first year and 1 percentage point in the second year.

Simply put, “Most homes are out of reach at today’s prices,” says Louis Solis, a real estate agent in Phoenix and Portland, Oregon.

Most of Solis’ recent deals have included some form of interest rate compensation equivalent to nominal price cuts, he said. Typically, this is a lump sum amount at the end of the trade that the buyer uses to purchase a temporary lower rate. Sellers with a lot of capital can fund buyers’ purchases at below prevailing interest rates by cutting out middlemen and acting as lenders. This is called seller financing.

Take out a mortgage and pay interest: These are creative but easy solutions to rising borrowing costs. But at the last minute, more and more investors are looking to buy a home with minimal cash, using a gray financial tactic known as the “Subject to” or “Subto” to find people who are behind on their debts. trying. They then enter into ancillary agreements to take over their (low-interest) payments (the agreements are said to be ‘conditional’ on existing loans).

This strategy is clearly attractive when interest rates are high, but it comes with a big star. Banks usually have the right to call a loan if the home changes ownership. In other words, it demands immediate full payment of the seller’s mortgage balance. . Also, even if the buyer fails to pay, the real estate may be seized, and the seller’s credibility will be lost for the home that no longer has an owner.

Nonetheless, Empire Titles president Bill McAfee has seen an increasing number of customers looking to change titles based on these terms, noting what matters with stock disclosures. He said he warned both sides of what could happen.

“We don’t agree to do this, but it’s a way to access real estate for very little money,” he said. “They have to decide if it’s worth the risk.”

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