It’s no secret that interest rates have been rising. This week, I heard a story about a buyer who was previously pre-approved and had recently made offers on several properties without realizing their ability to borrow had shrunk. Only after getting an accepted offer, when they revisited their financial situation with their mortgage broker, did they learn they couldn’t afford the house they were trying to buy. I would imagine this was probably crushing to all parties involved: buyers, sellers, the mortgage broker and the Realtors. These days, there are a lot of buyers waiving their contingencies with their offers, and if this particular buyer had no financial contingency, then their deposit was at risk, which may have been up to 3% of the purchase price!
One thing I’ve always done when reviewing offers, including recently looking at 8 offers on 516 Whitewood Drive in San Rafael, has been scrutinizing the pre-approval letters and contracts. I look to see that the pre-approval is recent, and that the loan amounts and interest rates in the contract match the pre-approval letter. I almost always call the mortgage broker before accepting offers. Occasionally, I don’t need to because some mortgage brokers will take the time to reach out to listing agents like me when their buyers make offers.
If a buyer isn’t keeping current with their lender, this spring they may be in for a BIG surprise. Getting a loan under 3% is a lot different than getting one at 4.5%, which is about where we are with conventional 30-year fixed mortgages. On a million-dollar mortgage, the payments jump from $4,216 to $5,067. The same $4,216 payment with a 4.5% interest rate will only finance a mortgage just under $840,000. It’s a case of the not-so-incredibly-shrinking buying power. I personally don’t think mortgage brokers, or even economists, really know where rates are going from here, but in the short term they could rise higher.
While rates are still very low from a historical perspective, that’s not so comforting to buyers who grew accustomed to seeing rates under 3% and calculating lower payments on more expensive houses. What will be the repercussions in the market? We may see a drop in demand, which could level the playing field between buyers and sellers. The sellers have been in the drivers seat for a while now with low inventory and high demand. It may be time for someone else to take the wheel.