The only goal was not to lose money.
When Matthew Kilboy listed the Washington, D.C. condominium he and his husband bought in 2017, they recognized that higher interest rates and a soft housing market meant that any dollar above the $529,000 they paid was a dollar for who thank their lucky stars. for.
A similar two-bedroom, two-bathroom unit in the building recently went for just under half a million. The $549,000 price they listed in April was essentially wishful thinking.
A month later, the couple closed for $565,000 — thanks to little-known amenities that became increasingly popular as mortgage rates rose. Their unit came with an assumed 30-year mortgage with a fixed rate of 2.25 percent, which the couple locked in after refinancing in November 2020. By advertising that the buyer could inherit the mortgage, the couple, who moved to Denver, received several overpriced offers , which looked like a holdover from the warped property market during the Covid lockdown.
“It was the very first sentence on the list,” said Mr. Kilboy, 39, a retired Navy nurse whose loan, backed by the Department of Veterans Affairs, could be transferred to the buyer. “No one had found an interest rate that low, so we really pushed it.
The Federal Reserve may have slowed rate hikes, but monthly mortgage costs remain more than double what they were 18 months ago. This has greatly reduced the supply of inventory for sale by discouraging millions of homeowners who took out favorable rates during the pandemic from selling their home and potentially spending hundreds of dollars a month in additional borrowing costs for a new home.
Because so few are being sold, home prices have remained stable and even resumed their rise, despite the huge increase in borrowing costs. The lore among real estate agents and economists is that anyone who has secured a mortgage rate of 3 percent or less has a valuable asset they are loathe to give up.
But every asset has a price. And now an emerging cadre of investors and real estate agents are trying to actually sell mortgage rates from a few years ago by passing them on to new buyers.
Redfin, the real estate broker, has seen a sharp increase in listings like Mr. Kilboy’s, which have comments such as “beautiful home with an affordable 3.25 percent loan.” Facebook groups have sprung up to find buyers for them, while new companies are offering services to speed up the transfer.
“Homeowners with predictable mortgages have something of value that many homebuyers want and would be willing to pay for,” said Daryl Fairweather, chief economist at Redfin. “For people who bought when house prices were near their peak but mortgage rates were still low, this can be an attractive way out of a regretful purchase.”
Investors are just as eager: The euphemistic “creative finance” has become a big topic of conversation on sites like BiggerPockets, a forum where property owners exchange tips on topics such as running short-term rentals and buying their first investment property. In books, seminars, and YouTube videos, influencers dispense advice on how to find struggling homeowners willing to transfer low-interest mortgages without their bank’s knowledge—a valuable but extremely risky strategy that title companies say they already they saw more.
“It’s just too appealing,” said Scott Trench, chief executive of Bigger Pockets, adding that many of these strategies often involve additional risks and paperwork that most people aren’t familiar with.
It all seems to underscore the way the nation’s real estate market has gone from pedestrian to dodgy, frozen in regret. Buyers are angry that cheap mortgages are gone. Sellers are reluctant to cut prices from pandemic peaks. Instead of accepting, a determined few are trying to use imagination and fine print to build a portal to the cheap money days of 2021.
Most US mortgages are not directly assumed. However, many popular government-backed mortgages — such as those insured by the Federal Housing Administration, the Department of Veterans Affairs and the Department of Agriculture — typically are, said Michael Fratantoni, chief economist for the Mortgage Bankers Association. According to Black Knight, a provider of mortgage technology and data, these loans are often used by first-time buyers and account for about a quarter of outstanding mortgages.
In theory, each of the millions of homeowners who have low-interest mortgages has a valuable asset to sell with their home. Still, estate agents say they can be difficult to convert in practice. For example, homeowners who transfer a VA-backed mortgage may lose their ability to obtain another similar loan if they cannot find a VA-eligible buyer to take on their original mortgage.
Or consider a homeowner who has a low-interest mortgage but has paid off part of it: To take over the loan, the buyer would have to come up with a large down payment that would factor in the seller’s equity—something very few people can do. do.
Craig O’Boyle hopes to create a business that makes assumptions faster and easier. Mr. O’Boyle has been a real estate agent who has been selling homes in Colorado for three decades, long enough to remember having to read the doorstop contracts that now buyers and sellers just click on DocuSign. When he read the lines about certain loans being assumed, he said he had long thought that if rates ever went up, those owners would suddenly find their debts had value.
“And then comes this shift in the interest rate market,” Mr O’Boyle said.
He started with a partner last year Solving assumptions, a consulting firm that, for a $1,100 transaction processing fee, helps real estate agents navigate mortgage transfers between sellers and buyers. In his pitch to agents, Mr O’Boyle says he is pushing rates below 3 per cent, as well as marble countertops or mountain views.
“When you’re selling it, and let’s say you’re competing with the house next door, your house should either sell faster or for more money,” he said.
Even for the vast majority of people using a non-convertible traditional mortgage, some rate compensation is becoming the norm. While home prices fell from their all-time high last June, they didn’t fall nearly enough to offset the rise in mortgage rates, and they’re rising again.
To stimulate new lending, mortgage companies have begun to market products in which borrowers can “cut” rates by paying a few thousand dollars over a year or two at significantly lower interest. One of the most popular products is “2/1 redemption”, where the borrower pays to reduce the interest rate by two percentage points during the first year and by one percentage point in the second year.
Simply put, “Most homes are unaffordable at today’s prices,” said Luis Solis, a real estate agent in Phoenix and Portland, Oregon.
Most of Mr. Solis’s recent deals have had some form of interest rate compensation, which is a price cut in all but name, he said. It’s usually a lump sum at closing that buyers use to purchase temporarily lower rates. Sellers with a lot of capital can cut out the middleman and finance a buyer’s purchase at below-the-line rates by acting as a lender – this is called seller financing.
Assuming mortgages, paying off rates: These are creative but straightforward solutions to rising borrowing costs. But on the flip side, a growing number of investors looking to buy homes with minimal cash are trying a gray financing technique — known as “Subject to” or “Subto” — in which they try to find people who are behind on their debts. and make a side deal to take over their (low interest) payments. (The deal is said to be “subject to” the existing loan.)
The strategy has obvious appeal when interest rates are high, but it comes with a huge asterisk: Once the house changes hands, banks typically have the right to foreclose — meaning they demand that the seller’s mortgage balance be paid off in full immediately. . Also, if the buyer falls behind on payments, the property can still be foreclosed on — destroying the seller’s credit for a home they no longer own.
Despite that, Bill McAfee, president of Empire Title, said he’s seen an increase in customers looking to change their title under these terms and has inventory information warning both sides of what could go wrong.
“I’m not saying I agree with it, but it’s a way to get into property with very little money,” he said. “They have to figure out if it’s worth the risk.”