Amid rising interest rates, sellers and purchasers alike have become cautious about their residential transactions. In this client alert, we provide more insight about the mortgage process, interest rates, and what it means for purchasers and sellers of residential real estate.
For residential transactions, common loan products include the standard 30-Year Fixed mortgage as well as various adjustable-rate loans. According to David Breitstein, a mortgage broker at GuardHill Financial with over 20 years of experience in the industry, the difference in rates for each loan product can be substantial. For example, the difference in interest rate between a 5/1 ARM and a 30-Year Fixed may differ by as much as 1.25% to 1.5%. This means a difference in monthly payment of $81 per $100,000 borrowed. In the case of a $1,000,000 mortgage, the additional payments are nearly $10,000 per year.
When considering the various loan products available, purchasers should earnestly analyze their time horizon for a property, their current and future lifestyle needs, and personal risk tolerance. The average first-time home buyer of a co-op or condominium apartment will likely keep their property for 3-5 years before their family or lifestyle needs outgrow the home, while buyers of investment properties may hold the property for longer. Buyers who intend to occupy a property for the full 30-year life of a loan may want to prioritize a lower interest rate, while a buyer who intends to sell in a few years may ultimately save money by avoiding higher monthly payments.
With rising interest rates, many buyers are eager to lock their rates as soon as possible. However, borrowers will generally be required to pay additional fees at closing to lock-in or extend an interest rate beyond the traditional 60-90 days. If the rate lock period must be extended, the extension fees can be significant. It is therefore important to consider any potential delays in the closing timeline and weigh the long-term cost of a higher rate against the associated rate lock fees.
In New York City, purchases of co-op apartments, in particular, can take longer than other transactions, sometimes more than 90 days after contract. Buyers should be mindful of extended contract negotiations, complexities in the loan and board application processes, when the next board meetings will be, how quickly the building typically reviews and approves applications, and how long the board and its management company typically need to prepare for closing after approval. These are the most common points of delay which may cause a closing date to surpass a rate lock expiration, costing buyers extensive fees to maintain their loan terms.
Second, once a loan product is selected, borrowers may consider arranging an assignment of mortgage with their seller in order to save on closing costs. The mortgage recording tax ranges from 0.75-2.8% of the loan amount depending on the location and type of property and is paid by the borrower at closing. A $1,000,000 loan, for example, on a single-family home in New York City would incur a charge of $19,220 at closing, a significant expense that may be reduced or altogether avoided by an assignment.
If a seller has an existing mortgage on the property, they can assign their loan to the buyer, even if the lender and terms of the loan are different, and the buyer will then only be responsible for paying the mortgage recording tax on the “new money”, or the difference between the seller’s and buyer’s loans. Therefore, if the seller has a loan of $750,000 remaining on the property at closing, the buyer’s mortgage recording tax would be based only on the $250,000 difference between the two loans, bringing the charge down to $4,470!
An assignment of mortgage also triggers a continuing lien deduction, which benefits the seller. Learn more about continuing lien deductions HERE.
Finally, after closing, borrowers may also consider opting for higher or more frequent payments (e.g., biweekly instead of monthly payments) to pay down the loan faster. Accelerated biweekly loans shorten the repayment period of the loan, and in turn, save on interest paid on the term of the loan.
For example, a 30-Year Mortgage at a loan amount of $500,000 and a rate of 6.5% will pay nearly $638,000 of interest over the 30 year amortization period. For the accelerate biweekly loan, the repayment period of the loan will be reduced to 25.5 years with $489,000 of interest payments, a savings of approximately $150,000.
If you would like to discuss your specific circumstances or would like more information, please feel free to contact us at (212) 625-8505.