At this rate...

"When rates head north—and the general consensus is that’s where they’re headed—typically what we see is that buyers are resilient. When a family or an individual has the bug to buy a home, they’re going to look for ways to make it work.” 

Shawn Cassidy
First Senior Vice President and Director of Residential Lending Sales at Valley

Written by Bernadette Starzee 
Long Island Business News
January 16, 2019

After flirting with 5 percent, mortgage rates fell last week to 4.51 percent, their lowest level in about eight months, according to mortgage enterprise Freddie Mac. The drop in rates may give a boost to home-buying – which had slowed after rates climbed to their highest level in more than seven years.

On Long Island, there were 1,856 homes contracted for sale in December, a decline of 6.2 percent from the 1,978 homes contracted for sale in December 2017, according to preliminary numbers from an online real estate database.

Mortgage application volume was off, as well. In the Mortgage Bankers Association’s Dec. 28 Weekly Mortgage Applications Survey, loan application volume decreased 9.8 percent from two weeks earlier, while the refinance index decreased 12 percent during the two-week period and the purchase index decreased by 8 percent. The results included adjustments to account for the holidays.

As interest rates began climbing last summer, there was a flurry of homebuying activity.

“People were terrified rates would keep going up, so there was a rush to get something before they got even higher,” said Peter Grosso, broker at ReMax Integrity Leaders in Centereach. “Then when the interest rates reached 5 percent, we saw a slowdown.”

The slowdown was much more pronounced at the higher price points, Grosso said.

“Here in the Northeast we got hit really hard by tax changes,” Grosso said. “That coupled with interest rates rising was a double hit to the luxury and second-home buyer market. The bigger houses have been sitting around.”

But with turmoil in the financial markets pushing mortgage rates back to where they were before the abrupt hike, “we’re seeing activity and affordability pick up,” Grosso said. “Buyers are not as anxious as they were over the summer – they’re not striking at a moment’s notice – but the tone of buyers is that now is the time.”

The drop in rates “occurred during the holidays, and probably is not yet fully understood by the market, so the early-spring home buyers will be pleasantly surprised when they call to get pre-approved prior to house-hunting,” said Rick Bechtel, head of residential lending for TD Bank. “When pre-approving a borrower, however, we will want to allow for some rate fluctuation in our approval assumptions, as there will be a time lag between pre-approval and the contract on the house (which is when a borrower can actually lock).”

As rates head upward, home buyers will make the necessary adjustments, according to Shawn Cassidy, the Jericho-based director of home lending sales for Valley National Bank.

“When rates head north – and the general consensus is that’s where they’re headed – typically what we see is that buyers are resilient,” Cassidy said. “When a family or an individual has the bug to buy a home, they’re going to look for ways to make it work.”

When rates go higher, buyers start shopping around more for deals, putting increased pressure on lenders to be competitive.

“There’s more compression in the rates, and profit margins shrink,” said Vic Pascale, who works in Melville and Patchogue as vice president for Freedom Mortgage, a direct lender. “Everyone is looking to be competitive.”

Being competitive includes offering “every product available, from down payment assistance to renovation loans,” which includes working with agencies such as SONYMA (State of New York Mortgage Agency) and FHA (Federal Housing Administration), Pascale said.

Renovation loans are a popular offering from Freedom Mortgage.

“Let’s say you’re focused on one neighborhood, but the houses are all $400,000 and up, and you can’t afford that,” Pascale said. “Maybe you can acquire a property for $250,000 that needs $100,000 of work. You can get one loan and put money for the repairs in escrow. As contractors do the work, they get paid out of the escrow account.”

Freedom Mortgage partners with SONYMA on a number of products. SONYMA’s offerings include 30-year fixed-rate mortgages with special features to help low- and moderate-income buyers purchase their first home. For instance, products include a 0 percent interest loan for up to $15,000 for down payment/closing cost assistance.

Many lenders offer special products for first-time home buyers. Valley has the Community Advantage loan, for buyers whose income does not exceed 80 percent of the HUD area median income. The product allows buyers to put as little as 3 percent down without having to purchase mortgage insurance (typically, mortgage insurance is required for down payments below 20 percent). Valley’s census trackbased Community Plus loan allows for 5 percent down payments, again without a mortgage insurance requirement, for homes purchased in low- to moderate-income areas.

Another option that began to gain traction in 2018, according to Cassidy, is shared-equity lending.

“We offer this option through a third party, Unison,” he said. “Say you’re buying a home for $500,000. You can put $50,000 down, and a third party puts $50,000 down, for a total of $100,000, or 20 percent down. You get a loan for 80 percent, and you don’t need mortgage insurance. You don’t make any payments to the third party; it’s not a second mortgage. They become an equity partner in your home and share in the appreciation or depreciation in value, for better or worse. It’s not for everyone, but it’s certainly an interesting product.”

Besides comparing deals offered by various lenders, buyers may adjust to higher rates by lowering their home price ceiling.

“If the rate goes from 4.5 percent to 5 percent, you’re looking at a difference of about $120 a month for a $400,000 loan,” Cassidy said. “So maybe they’ll lower their price range and look to borrow only $375,000.”

On Long Island in particular, he said, communities have a wide variety of real estate taxes.

“You may find similar houses with tax differences of about $3,000 a year,” he said. “That’s a difference of $250 a month and may be part of the solution.”

Another way to make it work is to consider a seven-year or 10-year ARM, a mortgage that starts out with a fixed rate and becomes adjustable after seven or 10 years, respectively. Typically, buyers would get about a half-point break on the adjustable rate mortgage, versus taking out a 30-year fixed-rate mortgage, Cassidy said.


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