8 tips for working with home sellers who have a mortgage of less than 4 percent

Stubbornly high interest rates have complicated the real estate market, but not brought it to a standstill. When people need a house, they buy a house – regardless of price, mortgage rate or market conditions. In many cases, there is no option to wait for a better deal.

This state of affairs has had a number of consequences. For example, 56 percent of starters on the housing market said they felt pressured to buy sooner than they wanted, fearing an impending economic downturn. That has led to an increase in homebuyer’s remorse.

Another consequence is the reluctance to sell among homeowners with rates less than 4 percent. Many of those homeowners now feel trapped in the ‘golden handcuffs’ of a historically cheap mortgage.

However, some of these homeowners have no choice but to move due to a new job or changing family obligations. Working with a seller who is reluctant to trade a mortgage of less than 4 percent for one that could be twice as much can be a challenge for a real estate agent.

8 Tips for Working with Embedded Sellers

1. Discover interest rate buydowns

Current mortgage rates may seem scary, but your customers can lower the interest on their next mortgage with lump sum payments.

For cash upfront, buyers can “buy down” their mortgage rate and permanently lower their monthly mortgage payment by purchasing points for 1 percent of their loan value. Each point typically lowers the mortgage interest rate by a quarter of a percent.

If your customers borrow $300,000, one point costs $3,000. Two points, which would cost $6,000, would lower their mortgage interest rate by half a percent. For $12,000, borrowers could purchase four points and reduce their rate by a full percentage point.

Lenders typically limit buyers to four points or less, but reducing a mortgage by as much as 1 percent can translate into significant savings. If your customers can pay the money upfront, on top of their down payment, it can help soften the shock of higher mortgage rates.

2. Set expectations

Buyers faced with higher mortgage rates are often psychologically prepared for higher monthly payments, but a common shock is the erosion of their purchasing power. A buyer who bought a large home when mortgage rates were 2 or 3 percent may not realize that he can now get a significantly smaller home with the same budget.

Before your clients go on tour, explain how much house they can afford and show them examples. If the first time they see their purchasing power demonstrated is on their first day of open house, it is very difficult to counteract that shock and disappointment.

3. Listen and empathize

Listening to clients is always one of the first responsibilities of a real estate agent, but this is especially true when dealing with reluctant sellers. Listen to their concerns and regrets, acknowledge the difficult circumstances, reassure them that they are doing their best, and generally just help them process their emotions. Once they do that, you’ll probably find that they’re ready to make the switch.

4. Investigate suspected mortgages

With assumable mortgages, buyers can assume the seller’s existing loan and inherit the lower rate. The process is traditionally slow and costly, often requiring a down payment of 35 percent or more to cover the seller’s equity.

But the market is catching up with newer financing solutions that offer faster closings, down payment assistance and blended interest rate options that combine the assumed interest rate with a secondary market rate loan. For sellers with flexibility, an acceptable mortgage could make giving up that sub-4 percent rate much less painful.

5. Accentuate the positive aspects

In many cases, sellers who leave behind low-interest mortgages do so because they have to. Maybe they got a new job in a new city or want to live closer to a new grandchild. Reframing their circumstances in relation to their new life goals can relieve the seller of much reluctance and regret.

Help them understand that they’re not so much giving up an affordable mortgage as trading it for a great new job or family opportunity, and they might feel a lot better about it.

6. Pitch a recast

One way to soften the blow of taking out a mortgage with a higher interest rate is to restructure the loan with the proceeds from a previous home sale. A recast takes a lump sum and applies it toward the principal amount of a loan, reducing the monthly payments based on that principal amount.

For example, if your buyer sells his current home, financed at 3 percent, and makes a $150,000 profit, he can take that money and recast his new loan at 6.5 percent. That 6.5 percent loan for $400,000 can then be reduced to $250,000, significantly reducing their monthly mortgage payment. Although their interest rate will still be relatively high, this is a great way to reduce their financial burden.

7. Maintain the low-interest loan and build rental income

Depending on the sellers’ circumstances, they may be able to keep their low-interest mortgage while getting a second one that is almost as affordable.

If they have flexibility about where they can move, some sellers choose to keep their current loan, convert their property to a rental property and try to get a low-interest government-backed mortgage on their new home. For example, an FHA loan has an interest rate that is significantly lower than a market rate loan and requires very little down payment.

If their current home is in a hot rental market, it could very well make enough to cover the mortgage payments and then some. If this arrangement is financially feasible for them, this is a way to maintain some flexibility and allow them to maintain their low mortgage interest rate.

8. Wait for the market

If your clients’ circumstances do not force them to move and they find today’s higher mortgage rates simply unacceptable, one option they have is to sell and then rent a home while they wait for interest rates to drop.

Forecasters are not optimistic that interest rates will fall meaningfully for at least a year, especially as the conflict in the Middle East pushes rates back up in the near term. With the current high mortgage interest rates and house prices, renting is a financially healthy choice in many markets.

May marks Inman’s seventh annual Agent Appreciation Month. Find profiles of top producers, opinions on the current state of the industry, and tangible insights you can implement in your career today. In addition, the prestigious Future Leaders of Real Estate Awards return.

Luke Babich is the CEO of Smart real estate in Saint Louis. Connect with him Facebook or Tweet.