“What do you want to spend on housing each month?”
As a real estate agent, it’s the most important question you can ask your clients. Different from “How much home can you afford”, a focus on your buyer’s monthly payment is a focus on something “real”.
Payment is paramount in the home search because — unlike purchase price — it’s something to which homeowners must tend monthly. Irrespective of health, wealth, or family, mortgage payments are due.
So, help your clients find their specific monthly housing budget. And, once you have done it, it’s surprisingly simple to know whether a given home is “affordable”.
To help your buyers understand home affordability, download the reference handout below.
Mortgage Rates Change Home Affordability
Once you’ve helped your client make a budget, be sure to keep tabs on it. The budget can be victimized by mortgage rates.
See, homes are more affordable today than at any time in recorded history, but it’s not because home prices are down. It’s because mortgage rates are. And every time mortgage rates change, your client’s maximum purchase price changes, too.
Did you know : In June 2011, mortgage rates changed every 3 hours, 23 minutes on average.
With mortgage rates changing as rapidly as they are, your client’s home affordability can be short-lived. Consider the budget-busting impact of rising mortgage rates.
For every 1 percent rise in mortgage rates, a buyer’s maximum purchase price falls 10.75%.
For example, if your buyer has 20 percent to put down and sees a $300,000 home, today, he can borrow at 4.500% and pay $1,216 monthly. But your buyer wants to wait for a price reduction and, 4 weeks later, he gets it — all the way to $285,000. He’s ecstatic. Until he talks to his lender and finds out mortgage rates are up 1 point.
That same home — selling for $15,000 less — now costs $1,295 to carry. It’s a $79 monthly increase, and $28,440 in extra payments over the life of the loan.
This is why it’s foolish to “time” the housing market.
Sure, your client may get their “great price”, but rising mortgage rates wipe out the savings (and then some).
Squeezing Extra Dollars From The Budget
So what do you do when your client needs to squeeze a few extra dollars from his budget? You can’t wait for mortgage rates, after all, because mortgage rates are random; there’s unpredictable day-to-day. But, you can do more with a mortgage.
Specifically, you can help your clients avoid ”over-paying” on their mortgage.
The most common example of “doing more with a mortgage” is recommending against the 30-year fixed rate mortgage when a lower-rate adjustable rate mortgage is more suitable. Homeowners planning to sell within 7 years, for example, don’t need a 30-year fixed-rate loan. Many will opt for the 30-year fixed anyway, however, citing “peace of mind”.
It’s an expensive insurance policy.
Example: In July 2011, mortgage rates for the 30-year fixed-rate mortgage were 130 basis points higher than for an otherwise identical 5-year ARM. As a result, buyers financing with a 30-year fixed paid 12% more each month for their mortgage.
It must be said: Although adjustable-rate mortgages are “cheaper”, they should not be used as a means to “afford more home”. They’re most suitable for people with a relocation history and/or with the ability to manage higher housing payments in the future. When appropriate, ARMs can be a huge money-saver.
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Legacy Comments
A marketing ploy that worked well for me: Today’s buyers are mostly not willing to “fix-up” a property. They want a used house to look like one from an HGTV show. I recently listed and sold a solid brick home in a good neighborhood. It had recently installed thermopane windows, gutters with gutterguard, and a well pump. Still buyer response was that the house needed too much work. Perplexed, I spoke with the showing agents and realized they meant the interior paint colors were dated. The house was priced well within it’s market range. Instead of dropping it further, I asked the sellers for a $5,000 price increase to be given to the buyers to decorate. The house went under contract in two weeks.
This is why I often advise clients to focus on homes priced well below those for which they might qualify and approach the purchase as an investor might. Not only does it make more financial sense in terms of what they will get out of the deal, but they also have a better buffer against future adverse economic events. Granted, this may not work as well in a pricier housing market or with a client set on one type of house or neighborhood, but I work in Phoenix, AZ where it is almost foolish for the average well-qualified buyer to try and max out his or her purchase in this environment. There are still too many great options available.
Excellent! I’ve had this same conversation far too many times to count over my many years as a Realtor and Mortgage Broker. “It’s all about the cost of the money”, not what the product costs.