Residential Magazine

Tunnel Vision

Prevent your borrowers from obsessing about rising interest rates

By Deb Klein

Yes, interest rates are rising and borrowers will zero in on this number. That’s the downside of two years of historically low rates. But more goes into a loan than just the interest rate. Your job as a mortgage originator is to educate your clients and give them the perspective they need as they make one of the biggest purchases of their lives.

Over the past two years, interest rates have remained incredibly low, which has greatly benefited homebuyers. At one point, the average rate for a 30-year fixed mortgage was 2.66%, according to Freddie Mac data. This year, however, rates have been rising faster than economists previously forecast.
Rates are climbing but still are relatively low. Two straight years of rock-bottom interest rates have given homebuyers a sense of tunnel vision, where lower rates become the end-all, be-all of a loan. Shaving a 10th of a percentage point off their rate becomes more important than the overall quality of the loan. Although rates remain low, they will not remain there forever, and many buyers will be in for a rude awakening if the mortgage professionals they hire and trust don’t educate them about this reality.
One of the best ways to do this is to teach your clients about the benefits of a loan, even if it has a higher cost. Clients tend to have knee-jerk reactions and pick loans only because the rates are the lowest. Mortgage originators can help expand their thinking.

Creative solutions

Low interest rates and an influx of cash buyers continue to make the real estate market extremely competitive. The reality is that many prospective homebuyers who want a traditional low-rate loan may take a long time to qualify for it. And waiting to qualify for a Fannie Mae or Freddie Mac loan could mean that a home within their price range is off the market.

Two straight years of rock-bottom interest rates have given homebuyers a sense of tunnel vision, where lower rates become the end-all, be-all of a loan.

Originators should be willing to help their clients find more nontraditional loans, which can be just as safe as more well-known options. Traditional lending guidelines for income and assets are notoriously slow to keep pace with the ongoing digital transformation of the economy.
Getting a client into a home now before prices go up can often be more beneficial than waiting. This allows them to get them a lower interest rate — especially useful as rates surged past 5% in April 2022. A bank-statement loan, for example, might be the better and quicker option that will get the buyer into the home they want at the right time. Help your clients get into a home that will appreciate in value, then help them leverage this appreciation by qualifying for a more traditional mortgage.
Nontraditional solutions are not always ideal for homebuyers. But clients will appreciate your creativity if you get them into their dream home in the short term while continuing to help them qualify for traditional financing in the long term.

Bigger picture

The reality is that hesitation due to rate increases is always going to exist, so mortgage professionals must do a better job of educating their clients at each new threshold and help them shift their perspectives. Homebuyers will suffer paralysis by analysis over any rate increase even as the numbers remain historically low.

Promise (clients) that you will keep in touch, reach out to them on a regular basis and be the trusted, transparent adviser for their mortgage needs.

Whether rates are 1%, 2%, 3%, 4% or 5%, people will worry about an increase. Originators need to help homebuyers understand that they can purchase their dream home without fighting to shave a few basis points from their rate. Homebuyers have grown accustomed to low rates and it will take some time to adjust people to this new reality.
Help homebuyers put increased rates into perspective. Show them how much more per month they will be paying for potentially higher rates versus current rates. What does each scenario look like for their monthly budget? Many buyers will come around to the reality of the situation if you are honest with them and give them the information they need.
But don’t just project negative outcomes to them. Show them the positives of owning a home by forecasting the potential appreciation of their home. Help the buyer understand not only what is happening now but what will happen in five years.
The job of a mortgage professional is not to simply prequalify someone for a loan and send them on their way. You want to educate them on the pros and cons of a particular loan (and homeownership) a decade down the line. Urge clients to stop focusing solely on interest rates. Convince them to look at the bigger picture. If you do that, you’re doing your job as a mortgage expert.

Promises fulfilled

The job doesn’t end when a client has closed on a home. Originators should continue to stay in contact with clients and help them find opportunities to improve their mortgage. If your clients trust you to look out for their best interest in the long term, then they will feel less apprehensive about taking a good loan with a higher interest rate in the short term.
Maybe you helped them get a loan that required mortgage insurance and they can now refinance out of it. The reality is that homeowners have accumulated a sizable amount of equity, and once they realize this, they will be less worried about interest rates in the 4% to 5% range.
You have to build relationships with clients so that when they should refinance, they won’t dismiss what you’re saying as just another sales pitch. This means you have to reach out to your client pipeline and offer real value. Promise them that you will keep in touch, reach out to them on a regular basis and be the trusted, transparent adviser for their mortgage needs, then follow through on that promise. If clients feel their mortgage professional is honest, looking out for their best interests and informing them of new opportunities in a competitive market, then they will continue to trust you.
Homebuyers have become accustomed to historically low interest rates to the point that many cannot look past that single number. Today, rates are rising back toward reality and mortgage experts need to help consumers adjust to that reality. Inform your clients that a low rate, while important, is not the sole consideration for choosing a mortgage.
Help buyers look past interest rates and find other benefits in a particular mortgage. Continue to educate and find opportunities for your clients even after they close on their homes. Doing so will help them confidently navigate a real estate market with rising interest rates. ●


  • Deb Klein

    Deb Klein is the branch manager of the Dublin, California, branch of Planet Home Lending. Klein and her team believe that mortgage origination should be approached with honest and straightforward communication that educates clients.  

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