LET’S admit it. The real estate market in Boston currently is a bit unpredictable. BostonMan Magazine Legacy Club member -and real estate agent- Dave Picardy has never been one to take the odds out of his own hands, however.
Recently Dave sat down with Anthony Lapolla of NRL Mortgage (widely regarded as the authority on home ownership lending in New England) to ask the questions we all want answers to about the current market.
In typical Dave Picardy fashion, no punches were pulled.
DP: When will rates improve?
AL: This might be the most common question in real estate these days! The honest answer is that nobody knows… and anybody that forecasts a specific date or timeline is likely wrong. There are so many forces in play, but we can boil it down to a couple points to shed some light.
We need to see 1 of 2 things… maybe both…before rates will budge. Either inflation trending closer to 2% and/or weakening in the economy. There has been continued talk of a potential recession, and while we aren’t quite there yet, mortgage rates historically perform well (decrease) during recessionary periods.
DP: What challenges are borrowers facing as a result of higher interest rates?
AL: The easy answer here is… affordability. Higher rates are having a dramatic impact on monthly payments compared to the lower rate environment we enjoyed for quite a few years. With both home prices and rates increasing at the same time, affordability has been an incredible challenge… I think this is why you’re seeing some unique products and strategies entering the market.
With many would-be home sellers handcuffed to their homes at 3% rates, inventory is another problem for buyers.
DP: How are lenders helping borrowers combat the rise in rates and affordability concerns?
AL: We are talking a lot about buydowns, both permanent and temporary. Seller credits to offset cost in some cases, even a few unique loan product offerings. We’ve seen a lot of interest in the Mass Housing Down Payment Assistance, as well as our recent release of a 100% financing FHA product, both of which can help offset some of the out of pocket expense when purchasing a home.
Being able to strategize with a buyer to help with lower monthly payment options or some additional funds to cover down payments and/or closing costs has been the difference maker in some scenarios.
DP: How do buydowns work?
AL: Buydowns, both temporary and permanent, have become very popular over the last year and a half due to the rapid rise in rates.
A permanent buydown refers to the buyer paying “points” as additional closing cost in exchange for a lower rate. This can be an extremely powerful tool in the right situation. When considering this strategy, I always look to the break-even point as an important factor – if the total cost vs the monthly savings “breaks even” in say, 40 months, is that a wise financial choice? Everyone and every situation is different… there is no right or wrong answer, but it’s an additional data point to consider.
Temporary buydowns on the other hand, much like the name suggest, are short term. Typically they are seller-funded (via a seller credit on the sales contract) and result in the borrower’s payment being calculated at a lower rate for a short period of time. For example, a 2/1 buydown would reduce the rate used to determine the payment by 2% in year 1, 1% in year 2, and returning to the note rate for years 3-30.
If the borrower happens to have an opportunity to refinance prior to the end of the temporary buydown period, any additional buydown funds still available are applied to the loan’s principal balance, so it’s a win-win! Whereas with a permanent buydown, once the points are paid they cannot be recaptured (more reason for the break-even point to be discussed)!
DP: Mortgage insurance… what’s the deal?
AL: It seems like this comes up daily. I think about mortgage insurance as a necessary evil – Nobody wants it, but the alternative is to be forced to save for 20% down before buying. In exchange for what usually amounts to a low cost, buyers have the opportunity to buy a home and begin building equity significantly more quickly. The misconception is over cost, which in a lot of cases is very small.
It’s also important to note that for Conventional loans, mortgage insurance is eliminated once the original loan is paid down to 78% of the homes original value. Removal can also be requested earlier at 80% LTV. Only FHA loans carry permanent mortgage insurance (as usual, with some exceptions).
DP: What is your approach to qualifying a borrower for a home purchase?
AL: I often find myself saying far too often that “mortgages are not one-size-fits-all!” Personally, my team and I take more of an advisory and data-driven approach to qualifying a borrower. Discussing budgets and comfort levels for expenses, total out of pocket cost, down payment scenarios, etc… it’s all part of it.
Ultimately, we don’t want anyone to regret their purchase, or to realize that they didn’t budget correctly for expenses or costs. Understanding the borrowers plans, goals, and dreams is so important to advising them correctly in addition to having a deep understanding of mortgage guidelines and requirements.
Breaking down multiple scenarios or options with a high level of detail allows us to provide great service, leaving the borrower with a great understanding of their options and feeling comfortable and confident.
Anthony Lapolla is a seasoned mortgage lender with over a decade’s experience in qualifying his clients at their best rates during real estate purchases. He and his team have built a foundation throughout Boston and its surrounding areas around integrity and transparency that feels like “home” the moment you meet him. Anthony and is wife Meaghan have been married for 7 years, live in Peabody and recently welcomed their first child in the summer of ’22!