Financial Opportunities Uncovered: A Keeler & Nadler Family Wealth Podcast

Trapped by Low Interest Rates: Solving Today's Housing Conundrum

• Andy Keeler

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The real estate landscape has shifted dramatically, and at the heart of today's housing crisis lies an unexpected culprit: the golden handcuffs of record-low mortgage rates from a few years ago. Homeowners who secured rates now find themselves reluctant to sell, constraining inventory and exacerbating market stagnation.

Antonio Benton, Senior Vice President at First Commonwealth Bank, joins us to unpack this complex challenge and reveal creative solutions for those feeling trapped by their mortgage rate. With current 30-year fixed rates hovering around 6.875% (close to historical averages but dramatically higher than recent lows), both buyers and sellers need fresh strategies to navigate this environment successfully.

We explore practical approaches to overcome today's mortgage obstacles, from the surprising affordability of adjustable-rate mortgages to innovative financing tools like bridge loans and mortgage recasting. For families helping the next generation achieve homeownership, we discuss intergenerational lending opportunities that benefit both parents and their children. And for retirees concerned about qualifying with limited income despite substantial assets, Antonio shares lesser-known strategies that open doors to continued mobility.

The conversation demystifies complex financing concepts while providing actionable insights for prospective homebuyers, reluctant sellers, and empty nesters alike. As Antonio reminds us, "Every day is different, every loan is different, every borrower is different." 

Have questions about your specific situation or ideas for future episodes? Connect with Andy on LinkedIn or send us an email – we'd love to hear from you.

The opinions expressed in this program are for general informational purposes only and are not intended to provide specific advice or recommendations.

It is only intended to provide education about finance, tax, retirement and related planning topics. To determine which investments or strategies may be appropriate for you, consult your financial, tax or legal advisor prior to implementing. Any past performance discussed during this program is no guarantee of future results.

Any indices referenced for comparison are unmanaged and cannot be invested into directly. As always please remember investing involves risk and possible loss of principal capital; please seek advice from a licensed professional.

Keeler & Nadler Family Wealth is a registered investment adviser. Advisory services are only offered to clients or prospective clients where Keeler & Nadler Family Wealth and its representatives are properly licensed or exempt from licensure. No advice may be rendered by Keeler & Nadler Family Wealth unless a client service agreement is in place.


Andy Keeler :

We're in the midst of a housing crisis, but there's more to the story than just a shortage of housing. Interest rates have made it difficult for buyers to afford what's out there. That's the obvious result of high rates, but there's an ancillary issue that is exacerbating the stagnation of housing sales. Empty nesters and others that locked in obscenely low mortgage rates a few years ago now feel stuck. Selling their home would mean walking away from the rates, never to be seen again, or probably never to be seen again Today on Financial Opportunities Uncovered. I welcome Antonio Benton, senior Vice President at First Commonwealth Bank, to help us try and solve this conundrum. Welcome, Antonio.

Antonio Benton :

Thanks, Andy, thanks for having me.

Andy Keeler :

So Antonio, the mainstream news headlines read housing shortage or shortage of affordable housing. The financial news bangs the high interest rates drum, but these issues are interrelated in the sense that home builders and developers have to pay higher interest costs to finance new housing projects, and then the home buyer gets stuck paying a higher purchase price plus a relatively high interest rate. The two together create a higher monthly payment. How can lenders help solve this problem?

Antonio Benton :

It's interesting. It's interesting it's not as much of us being able to solve the problem, but we play a big role in preparing the homebuyers for a reality that they haven't seen in five years. So, for example, a lot of buyers in the market today are in interest rates, like you mentioned earlier, in that 2.75 to 2.99%, and they're saying to themselves I'm going to die in this house. 0.99%. And they're saying to themselves, I'm going to die in this house. That's until they have another baby or there's a job change or the house just gets too small and they find another place that they love. So what we try to do is get them more prepared for what today's reality is and almost forget about yesterday.

Antonio Benton :

And it's one of those things like the old saying you know, back in my day we walked to school uphill both ways. And so you start looking at well, what were rates, you know? You start talking to folks and say, well, in the 80s I bought my first house and it was 12%, and the 90s were, you know, we were at 8%. So, relatively speaking, the rates today are kind of in line with the rates, since Fannie Mae's been keeping record of these since the 70s.

Andy Keeler :

And rates. Are what right about now?

Antonio Benton :

So right now the 30-year is at 6.875. Yeah, that's not crazy, no, and you can get a 15-year at about six and a quarter. So I think it's getting everybody used to a new reality.

Andy Keeler :

Yeah, it's just comparing, like you're saying, a new reality. You're saying we got spoiled with rates that I doubt we'll ever see in my lifetime 2.75% my first home, I think, was at six and it seems to me that the long long-term average is probably around there six ish, so at 6.875, we're just a hair higher than the long-term average is probably around there six-ish, so at 6.875, we're just a hair higher than the long-term average. But again, people are comparing it with the 2.75, so we're more than double to three times that. And it would seem like to your point, preparing them for today and forgetting about tomorrow. And really the way that we do that is just to look at the payment, ignore the rate. What is your monthly payment going to be? If you've never owned a home before, you're comparing that with a rent payment. So it really didn't matter what rates were. But if you own a home I guess it gets a little more complicated.

Antonio Benton :

Exactly. And then you start to think about things like well, I'm sitting on $400,000 in equity in this house, so when I go buy my next house, yes, the rate's going to be 6.875. But you know, I'm borrowing less because the home's appreciated more. So all those factors kind of come into play. And that's what we talk to everybody about, because everybody gets worked up about the rate and, like you said earlier, the news doesn't help us right, because everybody says, you know housing crisis and it's also dependent upon where you live. The market isn't the same everywhere. So we start to talk to folks about you know, our market in central ohio is going to be different than even the market in Cleveland or in Cincinnati. You know that's where we start our conversations is. You know, what are you looking for, what are your goals and how can we help you get there?

Andy Keeler :

I mentioned affordable housing and again, you know, affordable is a relative term.

Andy Keeler :

Not every suburb or city is going to have the same new home price, price per square foot, for example, is going to vary based on the school district, based on the amenities, all these things. So you know, I think every community can have affordable housing in that community. So when you're meeting with folks you gave the example of the person that owns a home. They're selling it, they have equity, so that certainly lowers the amount that they're borrowing. They're selling it, they have equity, so that certainly lowers the amount that they're borrowing on a new mortgage. But what are some other creative ideas that you can use to help keep the payment low? I know, for me I said my first rate, I think, was around 6%. I think I refinanced probably three times in seven years because the rates kept falling and I kept refinancing, and so the Fed has been talking about lowering rates and so if that happens, one would think mortgage rates will continue to trend down. I think they hit a high of almost 8%.

Antonio Benton :

Yeah, we were a little over kind of that seven and a quarter, seven and a half range for a period in 2020, I want to say end of 2023. And things started to calm down a little bit.

Andy Keeler :

So somebody that bought a house at that rate could be refinancing now, and obviously if they have a really large mortgage it's going to make more sense for them to do that. If their mortgage is $50,000 and the rate falls by half a percent or three quarters, the difference in payment's not going to be huge, and you're exactly right.

Antonio Benton :

So we actually had a little bit of that last summer where people that were in that seven and three-eighths to seven and a half rates came down. It was a couple weeks in August, rates kind of dropped and we got to that six and five-eighths and six and a half range. So, to your point, a lot of people that were kind of watching things were able to take advantage of that. Now, on the flip side, you had people set banking or kind of betting that the rates were going to go lower and they said, well, I'm going to hold off. And I had so many conversations with the folks and they just said you know what I'm going to, I'm going to wait, everybody's telling me the Fed's going to drop rates.

Antonio Benton :

You know the rate drop in August because they thought it was going to go lower. And then now you know, here we are. But I think it was a good lesson for them to learn. A lot of the customers that I dealt with that you know did that. They said you know. All right, I'm going to trust you next time when you call me. Next time, you know my rate target is going to be six and a half. So when it gets to six and a half, call me and we'll be ready to go.

Antonio Benton :

And that's what we try to you know. Let people know, because by the time the bottom hits it's too late, like nobody knows where the bottom is. So by that time things have already started to go up when you think you're at the bottom.

Andy Keeler :

I always tell clients, when they ask me if they should refinance at a certain rate. I say if you can save enough money to justify refinancing at that rate today do it now. You're happy with it, do it. But if you're wrong and it goes the other direction, you're going to be unhappy because you're not going to be able to save as much.

Andy Keeler :

When I first started in the financial planning industry in 1994, I actually originated loans. We basically did everything estate planning, property and casualty insurance. I actually originated loans. We basically did everything estate planning, property and casualty insurance. I originated home mortgages and home equity lines. I remember getting a fax every day from the various lenders that we used. We might get five or six of these rate sheets they were called. They had the interest rates for each lender broken down by the different programs. By by programs I mean 30-year fixed, 15-year fixed. Back then we had the seven-year balloon, a three-, five and seven-year adjustable rate mortgage, or ARM they're called. Each type had a corresponding par interest rate. So if the borrower bought or borrowed money at that rate, basically I would get paid nothing but I shouldn't say they would pay nothing. I mean there would be closing costs, but if a client wanted a lower rate, they could pay points or quote buy down that rate.

Andy Keeler :

What does that look like today? Do you still have a menu of choices to choose from, and do any of them look any more attractive than the fixed?

Antonio Benton :

Yes. So to your point when, when 30-year rates are up, people start to gravitate towards arms. To get back to that, you know, use the word affordability before it. So the ARM gives them a little bit more affordability because generally, you know, in a normal market, if let's just say our like I'll use today for, for example, the 30 year fixed today is six point eight, seven, five percent. Well, our five year adjustable rate mortgage is about five point nine, nine percent.

Antonio Benton :

So somebody looking to get, you know, into that home and not break the bank and still have a payment that's affordable, the five year arm is a good option for them. Possibly somebody starting out, you know a couple, two incomes and they're thinking, okay, I'm not too afraid of what might happen in the adjustment period, in the sixth year, because we're just starting our careers, we're probably going to, you know, make a little bit more money. Might not even be in the house, yeah, and the first one might be a condo. It might be a two-bedroom, one bath, just so they stop renting. They might be a two-bedroom, one-bath, just so they stop renting. So the arms become more and more common as the 30-year rates are higher. There's still a lot of products out there. The five-year arm is pretty popular right now. Seven-year arm as well. 30-year is still going to be the most popular product, but if you're looking for those opportunities to get into a home and an affordable payment, arms can be a great option.

Andy Keeler :

Yeah, that was always my experience. Mortgage rates are sort of based on higher level interest rates, like the 10-year Treasury and in a normal environment not to get too geeked out on interest rates. But there's something called a yield curve and basically with the yield curve, the longer the term, the higher the rate. The shorter the term, the lower the rate, and so that's normal. But we had gone through this period, maybe six months or a year ago, where the yield curve was inverted, so the arm rates were actually the same or even higher than a 30-year fixed. So you'd be a bonehead to do an arm then. But we're back to it sounds like normal.

Andy Keeler :

And so, basically what Antonio is telling us if you're listening, it's important you pay attention to this. There's almost a two-point spread between the five-year arm and the 30-year fix On a $400,000, $500,000 mortgage. That's serious money and so if you have been dragging your feet because you didn't think you could afford a property because of the 30-year fixed rate, you need to be looking at the arm rates right now. That's significant. And, as Antonio said, the other thing to consider is very few people stay in a house for 30 years. Relatively few people stay in a house for 15 years. There's a chance you may not even be in a house for five or seven years, and so why not go with an arm if you might not be there anyway, and then if you are still there, there's like a 2% cap.

Antonio Benton :

Right. Generally there's a 2% adjustment cap in any period, but in some cases, though the arms, they have a 5% max cap over the life of the loan and you could have that adjustment in the first adjustment period. So there is some risk there as you look at the arms. But to your point, you said something that struck me earlier. You said there was a period of time that you refinanced a few times within a couple of year period. So you start to think about that, because everybody says I've got to have a 30-year fix.

Antonio Benton :

And then you say, well, tell me how long you had your last loan. They said, oh, it was two years. Or you say, well, what about the one before that? It was three years. We refinanced because we took some cash out to redo the basement. So then you start, so they kind of sell themselves. Because you start talking them through it. You say, well, the chances of you being in this loan for 30 years are pretty slim. And I think that's the thing that, in our business, we have to get better at is just listening and not jumping to the conclusion that 30 years for everybody. Just kind of talk through their scenario with them, and a lot of times they'll come to the conclusion themselves.

Andy Keeler :

You know, one of the scenarios that I deal with the most are current homeowners that have identified their next home but they haven't listed their current home. Can you explain some of the ways that folks can go about buying that next home, or at least committing to it, while they still have, let's say, a mortgage outstanding on their current home? Back in the day they called them bridge loans. I don't know what you call them nowadays, but for purposes of a sort of case study or scenario, let's assume that the client currently owns a $500,000 home and they owe $100,000 on a mortgage on that home and they want to purchase a $750,000 home before they sell their current one. How do they get that done?

Antonio Benton :

Bridge loan is a term that has been around for a long time and it's kind of resurfaced with this change in how the housing market works. You used to be able to put an offer on a house and even potentially write in it's contingent upon the sale of my house. Those days are gone. You can't do that. You'll miss on every house that you want. But the bridge loan offers people the opportunity to take up to 80% of that equity out today.

Antonio Benton :

So, for example, let's just say your house to your example, the $500,000 house with a $100,000 mortgage on it. We would lend them up to 80% of that appraised value, so 400,000. And then we would subtract out the payment or the payoff for that mortgage of 100,000. So they've got 300,000 to put towards the $750,000 house and then we would give them a loan for the balance of the $450,000. Now another thing that has become more and more prevalent is people are saying well, I don't want to do a bridge loan because I'm at 2.875 and the bridge loan rates seven anda half. But I've got a pretty good income and we can put 5% down on that $750,000 house today and hold on to the rate that we've got on our $100,000 loan. So in that scenario what we do is we qualify them with both homes. They put 5% down on the $750,000 house and then, once that home sells, we do what's called a recast. It's about a $400 fee.

Andy Keeler :

I was going to ask you about the recast, but you beat me to it, yep.

Antonio Benton :

So there's a $400 fee. They pay that and once they sell their house they can apply those proceeds towards that $450,000 mortgage to pay that down even more. If they choose, get rid of any PMI that they have on it. So that's what we do and in a lot of cases that's becoming more and more popular. Because folks have good income, they have the money to put 5% down. They don't want to drain their savings, so they don't want to dip into that too much, but they do the 5% down payment. They sell their house, they put the proceeds towards it, they get rid of the PMI and they have a lot of equity in the new house. That's pretty popular right now because you can't write a contingent offer in a competitive market.

Andy Keeler :

No, houses are selling 5%, 10%, 20% above asking. You have six or seven people making offers. You can't put up any roadblocks. So for listeners, this term recast I want to kind of get into the weeds a little bit on that. So in a normal scenario, if you had a mortgage on the second home, you have high income, you've taken out a mortgage on the home you're buying Without the recast, you sell the previous home and you have all this equity that you're unlocking from the sale of that first home. If you sent $400,000 to the mortgage company, they would pay that loan down on the second mortgage but your payment would remain the same because when the loan was originated they based the payment on the original loan amount. So while your principal balance decreases and the amount of time it's going to take for you to pay the house off decreases, your monthly payment doesn't change at all. With a recast, they essentially take the proceeds from the sale of the first house, apply it to the principal of the new loan but recalculate your monthly payment. So you know it's again the arm, the recast. These are things that maybe you're not hearing about and you probably ought to ask your mortgage person or Antonio Benton about Another scenario we've helped clients with is helping their children buy their first home.

Andy Keeler :

When mortgage interest rates were under 3%, this wasn't as big of a deal. The kids simply went to the bank. Maybe the parents helped with the down payment. But with mortgage rates now at over 6% and money market yields around 4% and savings accounts paying less than 1%, we saw an opportunity to keep it in the family and basically what I mean there is cut the bank out, cut the middleman out. Antonio doesn't want to hear that. If you have parents that are fairly well off, they have money set aside for retirement. Maybe they're not going to use it all and they're going to end up giving it to the kids that they're passing anyway. This gives the parents an opportunity to see their kids enjoy the fruits of their labor now while they're still alive. So the way that it works, the parents can loan money to the kids at maybe four to five percent, giving the kids a big break on interest costs and the parents get a boost on the interest they earn on their money.

Andy Keeler :

Not to go down a rabbit hole, but to do this right, there are a few important stipulations. First, to pass IRS scrutiny, you need to be aware of the gift tax exemption limits as well as the IRS applicable federal rate. The IRS basically says if you charge 1%, we're going to call it a gift and we're going to tax you on it. If you use the IRS applicable federal rate, it's not considered a gift. It's basically like a mortgage or a loan that you would have between two disinterested parties. If you're giving kids a down payment, the IRS allows one to give up to $19,000 without filing a gift tax return, and I should note that gifts are not taxed at any amount. More on that if listeners have questions and want to reach out. So the gift tax thing is complicated. I don't want to get into that on this podcast. So a husband and wife can give up to $38,000, that's 19 apiece to their child, or $76,000 to their child and spouse, no questions asked.

Andy Keeler :

The bank may want to know where the money came from when the kids go to get a mortgage for the difference, but otherwise easy peasy. If you're interested in loaning your kids money for a home purchase, there are two ways to do this A simple promissory note or you can draft an actual mortgage With the mortgage. The mortgage is recorded. The parent is a lien holder on the home, just like the bank would be, and the child gets to deduct the interest like a traditional mortgage. You have to charge again at least the IRS AFR to be legit. Before you start creating this stuff in a Word document or using LegalZoom, consult your attorney and CPA. So, Antonio, what other creative ways are you seeing as people try to tackle their own unique housing challenges?

Antonio Benton :

The gift is a big one, that's a popular one. Parents are saying we are planning to give you this money eventually. We want to put homeownership in play for you, especially as affordability becomes more challenging. So we start to see, you know, parents giving inheritance money early in some cases.

Antonio Benton :

They'll become what's called a non-occupying co-borrower, so they actually go on the on the mortgage with the kids. We, their income is able to be used. And this can be in a scenario where you might have a son or daughter who just got in a sales position and they're really doing really well in sales. But in our business we have to verify that you have two years of a track record in sales. Well, you know, john might be doing great, you know making $150,000 a year, but we only have six months track record. So mom and dad trust that John's going to continue to do great in his career and he's going to pay the mortgage. So they'll go on as a non-occupying co-borrower and that way we can use the parents income to help qualify John for the house. So we're starting to see some things like that.

Andy Keeler :

And in that scenario, again two years down the road, a kid can refinance probably at a lower rate than they're at now. So the parents are off the hook two years down the line and the kids actually save some money in their interest costs. So pretty good deal. So another scenario we run into again the stereotypical empty nester. The idea is, after junior graduates from college and starts a family, you sell the family home that you raised your family in and you move to Florida or you buy a condo or whatever.

Andy Keeler :

But folks that have purchased homes and qualified for mortgages understand that the banks want to see income. They're basing the qualification for a mortgage on income and the clients are saying you know, I don't have any income, it's Social Security. I'm getting $60,000 a year from Social Security and my mortgage payment is going to be 100% of that. No bank is going to loan me the money. Yeah, they will If you have adequate assets. More or less what we do is we take the assets that they have and write a letter to the bank, more or less saying that this $2 million slug of IRA money or taxable transfer on death account trust account money could provide X per month for the next 30 years and we sign our name to it and the bank accepts that in lieu of actual income hitting their account, one other thing we've done is actually turned that income up and so if we're telling the bank that they can get $5,000 a month, we start sending their bank account $5,000 a month so the bank can see there's $5,000 a month going in there.

Antonio Benton :

That's a great point, Andy. I've had so many conversations with frustrated retirees. They've worked their whole lives, they're going into retirement, they've got significant assets and they're saying my bank's telling me I can't get a loan. And that's not true. What it takes is just a little bit deeper dive into the situation. So, as Andy explained, we can take those assets and amortize them anywhere from 20 to 30 years. And then the other scenario that we have is, you know, we can actually look at those assets and say, all right, in order for us to qualify for this loan, we probably need an income of $10,000 a month. Well, if they're sitting on an IRA that has three quarters of a million dollars in it, that $10,000 a month can obviously last them for 75 months.

Antonio Benton :

So the way that we look at it and the way we underwrite it is we want to show that they've taken that distribution of $10,000 and that that distribution can continue for 36 months, and that's how we review it. So you've got a couple of different ways to look at it. You can do the amortization over 24 or over 20 years or 30 years, or you can do the monthly distribution and we qualify you that way. So, and that's that's where we really want to get that word out to retirees, because I think they do get panicked about well, I don't want to retire. I got to buy a house before I retire. No, you don't. You can go into retirement. You've earned it, you've saved up your whole life and we just got to find some ways to help you. And that's what we do. Just try to find a creative solution.

Andy Keeler :

I think the moral of the story is being creative and working with a financial advisor or a mortgage lender. That is, looking at all the options and looking at every client's situation in a unique way, as they should.

Antonio Benton :

Exactly, we have to be better listeners. I think that's the key. I think too many, too often, we think that everybody is, you know, everybody's the same and every scenario is the same, and that's what I love about my job is every day is different, every loan is different, every borrower is different. And it's what I love about my job is every day is different, every loan is different, every borrower is different, and it's my job to listen to them and find a solution that makes sense for their particular situation.

Andy Keeler :

All right, well, thanks, Antonio, for solving this tricky math problem. I'm Andy Keeler and this is Financial Opportunities Uncovered brought to you by Keeler and Adler Family Wealth. If you have questions on anything you heard in this episode, or if you have an idea for a future episode, connect with us on LinkedIn or shoot me an email.

Speaker 3:

The opinions expressed in this program are for general information purposes only and are not intended to provide specific advice or recommendations. It is only intended to provide education about finance tax, retirement and related planning topics. To determine which investment strategies are appropriate for you, consult your finance, tax or legal advisor prior to implementing. Any past performance discussed during this program is no guarantee of future results. Any indices referenced for comparison are unmanaged and cannot be invested into directly. As always, please remember, investing involves risk and possible loss of principle. Please seek advice from a licensed professional. Keillor and Nadler Family Wealth is a registered investment advisor. Advisory services are only offered to clients or prospective clients where Keillor and Nadler Family Wealth and its representatives are property licensed or exempt from licensure. No advice may be rendered by Keillor and Nadler Family Wealth unless a client service agreement is in place.