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Adam Brown is joined by Federico Montoya from Synergy One Lending, located in Denver, Colorado for a discussion about mortgage rates, and what realtors need to understand moving into this shifting market.
Federico states that the top thing buyers are asking about is what the rates are, and how that will affect what they can afford.
As of Monday, September 26, 2022, rates for a 30-year fixed mortgage were at a 20-year high, at slightly over 7%. This was a large increase since the beginning of August when rates seemed to be settling down. The lower rates were driven by strong economic indicators such as business spending and home sales. Federico will be watching the economy closely for the next few months to see what the indicators are showing. The Federal Reserve meets in November, and rates may rise again at that time.
Short term, he expects rates to remain in the high 6s to low 7s through the spring. Long term, he believes rates may go back in the 5s or mid 6 range. Psychologically, that will make a big difference for buyers and sellers.
One concern Adam has about the rising rates is that rents are still really high across the board. Typically, when rates increase, price values come down, but that’s not happening now. He says it’s like a three-headed monster: rents are high, rates are high, and equities are high. However, regardless of the rates, people will still buy and sell houses. People are still going to be transferred, families will outgrow their existing homes, and people will get divorced and need to move. He doesn’t expect home sales to drop off dramatically in the coming year.
Temporary 2-1 Buy Down
Federico explains that they’ve seen a lot of market volatility the past few weeks, and it’s important to stay in close contact with agents and buyers as the rates change, as that will affect their purchase point. He isn’t seeing Adjustable Rate Mortgages (ARMs) pricing out as well compared to a normal 30-year fixed rate, except for jumbo loans.
Instead, what he is recommending is a 2-1 temporary buy down, which allows an amount to be paid up front to bring down the interest rate by 2% from the going note rate at the time of lock. For example, if the rate is 7% today, for the first 12 months your payments are based on 5%. The second year of payments are based on 6%. The good thing about this product is that money goes into a deposit account with your lender, so if you decided to refinance before that 2-year time frame, the money remaining can be used to reduce the principal balance. The risk on this type of loan is that the rates don’t drop in the next two years, and your remaining payments will be at 7%.
Your loan officer will calculate this from a percentage of the loan amount, but a realtor can give their buyers an estimate of what this will look like on their payments. In simple terms, you take what the monthly payment would be, and reduce by 2% for 12 payments, and then calculate that at 1% for 12 payments, then add that up to get the amount that will be paid for upfront. One note, the upfront payment can’t be made by the borrower. It has to be paid for through a concession from the seller, by the agent, or by the lender.
Data From Mortgage Applications
Mortgage applications were down in June and July, but was up in August. Federico thinks this can be attributed to the lower interest rates that we saw at the beginning of August. He explains that there is usually a month lag in getting data, so he doesn’t know what September looks like yet, but he states that closings were down significantly in September. Applications and loans going into October are also down. Re-fi applications are way down.
To the point about re-fi’s being down, Adam shares that he read a stat in first quarter 2022 that 75% of Americans had either bought a new house, or had done a re-fi. That means that three out of four homeowners are sitting on a really good rate.
Crypto for Down Payments
Federico states that the usage of crypto for down payments has gained momentum the past couple of years. Fannie Mae backed loans allow for this, and typically getting the necessary documentation isn’t that difficult. The lender will need to be able to see the activity in the wallet back 60 days. If someone wants to use crypto as their down payment, it’s important to have that conversation upfront to know what is needed based on Fannie Mae guidelines.
Fannie Mae Guidelines
Federico explains that if a person is transferring their crypto from a cold wallet to Coinbase or other exchange, it would need to be seasoned for 60 days to meet Fannie Mae guidelines. However, in some cases, if they can document those funds under the borrower’s name before the crypto is transferred into Coinbase, they are able to use it without the seasoning needing to occur in Coinbase. To do this, they need to see the activity back for 60 days with balances. What Fannie Mae is really looking for are large deposits. When you can show daily activity for 60 days with no large deposits, there shouldn’t be a problem. If there are large deposits, then they have to be able to show the source of those. The critical part is not necessarily where the asset is being held; rather, it is documenting the borrower’s name, what the value of the asset is, and then documenting the transfer of that asset ultimately into their bank account to then be used for the down payment.
What Does Synergy One Do That is Unique?
Federico is licensed in several states, including Colorado, California, Washington, Nevada, Ohio, New Mexico, Arizona, Florida and Virginia.
What sets Synergy One apart from other lenders is that they personally like to problem solve. When someone comes to Federico with a challenging scenario, he likes to find a solution for them. They have products like a quick close HELOC, where they can close in as little as seven days. Synergy One also has a great leadership team, who are constantly looking for new products, and the company is evolving all the time to remain competitive in the changing market.
Adam urges anyone with questions about rates, traditional lending, crypto transactions, and seasoning of funds to reach out to Federico, as he’s very knowledgeable, and ahead of the curve. Having a good mortgage partner on your side is going to be an asset every realtor should have moving forward.