Navigating Rising Rates

Educate your customers so they don’t fear the ongoing changes.

Insider

Contributing Writer

For the past few years, everyone has been speculating about rates going up. Well, wonder no more — rates have increased. We can’t be certain if they will get even higher or come down, but we can count on rates continuing to change.

Most industry professionals have never seen rates move as quickly as they have been lately, so let’s take a moment to dive into rates and how you can help your borrowers navigate this higher-rate environment.

Rate Trends Historically

Like I said, if we know anything about rates, it’s that they will fluctuate. Every decade — and even every year — they will have their highs and lows. It’s encouraging to remember that these are not the highest rates have ever been — not even close. Rates have been so low in the last few decades that it makes today’s rates seem more intimidating than it should. It is the highest they’ve been in years, but if you look over decades of rates, today’s “high” rates are still well below average, data from Freddie Mac shows. Rates have been as high as 19% looking back to the early 80s and the average for a 30-year-fixed-rate over the last 30 years is 7.78%. When examined wholistically, rates aren’t as bad as they seem.

Navigating High Rates

Though rates are still historically low, they are the highest they’ve been in quite a while. Many of you, especially new professionals, may be unsure about how you can help borrowers in this environment. High rates create uncertainty for you, so just imagine how your borrowers feel. Between increased rates and low inventory, anyone on the hunt for a home is frazzled.

With this in mind, do your best to ease their concerns. There can be so much stress associated with buying a home right now, so help your borrowers understand the process. The more they know about getting a mortgage, the less they will fear it. Also, help them understand why rates have shot up. The average borrower does not have a great understanding of how the market works. Again, the more they know, the less they have to fear.

Finally, be sure to communicate any options they have for dealing with increasing rates. There are many programs out there for all types of borrowers that can help them manage affordability and offset the cost of higher rates.

Rates have been so low in the last few decades that it makes today’s rates seem more intimidating than it should.

ARMs

For example, adjustable-rate mortgages are a potential solution for a lot of borrowers looking to deal with today’s higher rates. ARMs have been out of the conversation for the better part of a decade. According to CoreLogic data, ARM share of the dollar volume of mortgage originations moved from near 45% in 2005 to 2% in 2009. Since then, the ARM share has varied from as high as 18% to as low as 8%. ARM usage declined during the pandemic and reached a 10-year low of 4% in January 2021. At the end of April, the Mortgage Bankers Association reported that the share of ARMs as a percentage of home loans had doubled over the last 3 months.

Since not many people use them or understand them, ARMs have gotten a bad reputation. It’s easy for anyone to hear the word adjustable and just assume the rate will change unpredictably and without warning, so let’s talk about how ARMs work so we can remove that stigma and help more borrowers with this product.

How ARMs work: With a hybrid ARM, during the initial number of years, which is determined upfront, the interest rate will stay the same. The initial interest rate will change based on an index that reflects general economic trends but is set for that initial period when the loan closes. There is also a margin, which is an extra percentage the lender adds along with the index. After the initial period, the interest rate may change each adjustment period; the adjustment frequency and index are disclosed at application along with the maximum cap.

Lenders will generally charge lower initial interest rates for ARMs than for fixed-rate mortgages of the same amount, which makes ARMs an option for those who don’t plan to stay in their house very long. ARMs also can be an option for anyone expecting their income to grow over that initial period of time.

An ARM could potentially be less expensive over a long period than a fixed-rate mortgage — for example, if interest rates remain steady or move lower.

Empower Borrowers

Navigating a rising rate environment may feel foreign to many of you, but it’s time to step up to the plate. It is the lender’s job to help borrowers move through changing markets and educate them about their options for buying a home without increasing their concerns needlessly.

Don’t be discouraged by today’s market and don’t let your borrowers become discouraged either. Rather, empower them with the right tools, products and knowledge that can guide them to their new home.