Home Buying

Home buyers experience sticker shock at the loan office

Why a big down payment can backfire.

Though they are constantly fluctuating, 30-year, fixed mortgage interest rates rose from 3.76 percent to 7.08 percent between March and October this year.

By Jim Morrison -- Boston.com Correspondent

December 14, 2022

Surging prices, fierce competition, and dwindling numbers of homes for sale have made it notoriously difficult for buyers to get their offers accepted on the homes they want. Now, high mortgage interest rates — which have doubled since March — are causing big problems for buyers, with some surrendering their deposits altogether.

Though they are constantly fluctuating, 30-year, fixed mortgage interest rates rose from 3.76 percent to 7.08 percent between March and October this year. According to Freddie Mac, mortgage rates have never doubled in a year before.

Online brokerage Redfin reported on Dec. 2 that 2.9 percent of the active listings in Boston and 2.6 percent in Providence were pulled off the market. The online brokerage attributes the record number of “delistings” nationwide to “a sharp drop in home buyer demand driven by rising mortgage rates and persistently high home prices.”

“While mortgage rates have dipped slightly since mid-November, the monthly mortgage payment on the median-asking-price home is still forty percent higher than it was one year ago,” Lily Katz and Ben Walzer noted in the report.

In September, Redfin said 10.1 percent of pending sales in metro Boston fell apart in August. And that was when the average long-term interest rate on a 30-year, fixed-rate mortgage was still in the 5s.

Scott Kriss, owner of Kriss Law | Atlantic Closing and Escrow, said he isn’t seeing a lot of deals fall apart, but buyers who weren’t keeping an eye on interest rates are shocked to discover that their prospective monthly payments have ballooned.

“They’re making offers in the price range where they were preapproved, at say, three percent, and when they go to lock in their rate after signing the purchase and sale agreement, it’s a lot different,” Kriss said. The deals “are falling apart, or people find they can’t afford or don’t want to pay that much.”

Kriss said to avoid these unpleasant surprises, his firm cautions buyers to stay in touch with their lenders so they will know what their monthly payment will be based on the latest rates. Since the market has cooled, he’s also suggesting his clients consider smaller down payments.

“Historically buyers have put down 5 percent of the purchase price when signing the purchase and sale agreement,” he said. “During the pandemic, people were upping that to 20 percent to make their offer more attractive. We’re cautioning against that now. We don’t want to see people putting more money on the line in this environment.”

Kriss said home buyers should stay in touch with their lenders about more than just their rate. Many lenders have announced layoffs this year, while some have folded altogether. He also pointed out that experts like the Mortgage Bankers Association are forecasting that rates will fall a bit in 2023, which would give buyers the chance to refinance their loans and lower their payments.

Both Kriss and Nikolaos Ligris, co-managing partner at law firm Ligris and Associates, estimate that about 5 percent of their clients are encountering issues with higher payments. Ligris said it’s affecting developers of condos and teardowns as well. Buyers who put down deposits while their units are under construction risk seeing their low rates expire before their home is completed in some cases.

“For example, I represent a developer on a project in West Roxbury where it’s running about three months behind and the developer is paying for the buyers’ rate extensions,” Ligris said. “So far only one buyer has walked away, and that’s because their lender just wouldn’t extend the rate any further.”

Ligris said he sees the problem more often with condo purchases.

“The markets that we see impacted are primarily the million-dollar-plus two-bedroom condos in South Boston and East Boston,” he said. “That’s the market that we’re seeing most of the volatility and where we’re seeing people potentially being willing to walk away from their deposit.”

Ligris also said home buyers should shop around for their mortgages. Zillow reported in mid-November that home buyers spend more time researching vacations or their next car purchase than they do researching mortgages. Seventy-two percent of the respondents the online brokerage surveyed said they haven’t shopped around and don’t intend to.

There are still credit unions and community banks that have rates lower than the national average, Ligris said.

Stacey Alcorn, broker/owner of LAER Realty, said that even if a home buyer’s rate goes up, there are also ways to lower the monthly payment.

“We’re seeing buy-downs where sellers contribute to buying points to get the interest rate down a little,” she said. ”There’s also all kinds of adjustable rate mortgages, like one-year ARMs or five- or seven-year ARMs that have lower rates. There are other mortgage programs with a low down payment that don’t require mortgage insurance, too.”

Alcorn said she instructs her agents to remind their buyers that even if they’ve found their “forever home,” they can always refinance into a mortgage that suits them better as their life circumstances and interest rates change.

“We keep saying to our clients, ‘You’re buying the home, not the loan,’ ” she said. “They’ll eventually be able to refinance into a lower rate. Then, they’re actually in a better position than the person with a lower rate who also paid 5 to 10 percent over the market value just to get a house.”