The most exciting thing in real estate is a loan from two years ago

The only goal was not to lose money.

When Matthew Kilboy listed the Washington, D.C. condominium he and his husband bought in 2017, they accepted that higher interest rates and a soft apartment market meant that every dollar over the $529,000 they paid was a dollar they gave their lucky stars would thank for.

A similar two-bedroom, two-bathroom unit in the building had recently sold for just under half a million. The $549,000 price they quoted in April was actually a wish.

A month later, the pair closed at $565,000 – thanks to a little-known provision that has become increasingly popular as mortgage rates have risen. Their unit came with a supposed 30-year mortgage, with a fixed interest rate of 2.25 percent that the couple secured after a November 2020 refinance. By advertising that the buyer could inherit the mortgage, the couple, who moved to Denver has moved, several over-inflated asking price bids that seemed like a remnant of the twisted real estate market during the Covid lockdown.

“It was the very first sentence of the offer,” said Mr Kilboy, 39, a former Navy nurse whose loan, backed by the Department of Veterans Affairs, could be passed on to the buyer. “No one could find an interest rate that low, so we were really pushing it.”

The Federal Reserve may have slowed rate hikes, but monthly mortgage payments remain more than double what they were 18 months ago. This has significantly reduced the supply of inventory for sale by discouraging the millions of homeowners who snapped up a bargain during the pandemic from selling their homes and potentially incurring hundreds of dollars a month in additional borrowing costs for a new home.

Because there is so little to buy, house prices have remained stable and are even rising again, despite a huge increase in borrowing costs. The chorus among real estate agents and economists is that anyone who has obtained a mortgage interest rate of 3 percent or less owns a valuable asset they are reluctant to give up.

But every possession has a price. And now an emerging cadre of investors and real estate brokers is trying to sell mortgage interest from several years ago by transferring it to new buyers.

Redfin, the real estate brokerage, has seen a surge in listings like Mr. Kilboy’s with comments such as “beautiful home with an acceptable loan of 3.25 percent.” Facebook groups have popped up to find buyers for them, while new companies are offering services to speed up the transfer.

“Homeowners with mortgages that can be taken on have something of value that many homebuyers want and are willing to pay for,” said Daryl Fairweather, chief economist at Redfin. “For people who bought when house prices were nearing their peak, but mortgage rates were still low, it can be an attractive way to get out of a regrettable purchase.”

Investors are just as excited: The euphemistic “creative financing” has become a huge talking point on sites like BiggerPockets, a forum where landlords exchange tips on topics like short-term renting and buying a first investment property. In books, seminars and YouTube videos, influencers offer advice on how to find struggling homeowners willing to hand over a low-interest mortgage without their bank’s knowledge — a valuable but hugely risky strategy that title companies say they’re using more of. have seen.

“It’s just too appealing,” says Scott Trench, CEO of Bigger Pockets, adding that many of these strategies often involve additional risk and paperwork that most people are unfamiliar with.

From the pedestrian to the dodgy, it all seems to underscore the way the country’s real estate market has been frozen with regret. Buyers are outraged that cheap mortgages have disappeared. Sellers are hesitant to lower their prices from the peaks of the pandemic. Instead of acceptance, a few determined people are trying to use imagination and fine print to build a portal to the days of cheap money in 2021.

Most US mortgages are not immediately transferable. However, a large number of popular government-backed mortgages — such as those insured by the Federal Housing Administration, the Department of Veterans Affairs and the Department of Agriculture — are typical, said Michael Fratantoni, chief economist at the Mortgage Bankers Association. These loans are often used by first-time buyers and account for about a quarter of outstanding mortgages, according to Black Knight, a provider of mortgage technology and data.

In theory, every one of the millions of homeowners with a supposed low-interest mortgage has a valuable advantage to sell along with their home. Still, brokers say it can be tricky to transfer them in practice. For example, homeowners who transfer a mortgage with VA coverage may lose their ability to get another similar loan unless they can find a buyer who qualifies for VA to take out their original mortgage.

Or take a homeowner who has a low mortgage but has paid off part of it: To take on the loan, a buyer would have to put down a large down payment to cover the seller’s equity – something very few people can do. Doing.

Craig O’Boyle hopes to create a company by making assumptions faster and easier. Mr. O’Boyle is a real estate agent who has been selling homes in Colorado for three decades, long enough to remember having to read through the doorstop contracts that buyers and sellers now just click through on DocuSign. He had read about the rules that certain loans were plausible and had long thought that if interest rates ever rose, those owners would suddenly discover that their debts had value.

“And then here comes this shift in the interest rate market,” said Mr. O’Boyle.

Last year he started with a partner Assumption solutions, a consulting firm that, for a processing fee of $1,100 per deal, helps brokers navigate the transfer of mortgages between sellers and buyers. In his pitch to agents, Mr. O’Boyle that they impose rates below 3 percent, just like marble countertops or mountain views.

“If you put this on the market, and let’s say you compete with the house next door, your house should sell faster or for more money,” he said.

Even for the vast majority of people using a conventional non-transferable mortgage, some sort of rate offset is becoming the norm. Although house prices have fallen from their all-time highs in June last year, they have not fallen nearly enough to offset the rise in mortgage rates, and they are rising again.

To encourage new lending, mortgage lenders have begun marketing products where borrowers can “buy off” interest by paying several thousand dollars for a year or two at significantly lower interest rates. One of the more popular products is a “2/1 surrenderin which a borrower pays for an interest rate cut of two percentage points during the first year and one percentage point in the second year.

Simply put, “Most homes are unaffordable at current rates,” said Luis Solis, a real estate agent based in Phoenix and Portland, Oregon.

A majority of Mr. Solis’ recent deals have had some form of interest compensation that is a price cut in all but name, he said. Usually it is a lump sum at closing that buyers use to temporarily purchase lower rates. Sellers with a lot of equity can cut out the middleman and finance the buyer’s purchase below the prevailing rates by acting as a lender – seller financing, it’s called.

Take on mortgages, lower rates: these are creative but simple solutions to rising borrowing costs. But on the margins, an increasing number of investors who want to buy homes with minimal cash are trying a gray financing technique – known as “Subject to” or “Subto” – where they try to find people who have fallen behind on their debts and make a side deal to pay their debts. take over (low interest) payments (the deal is said to be “subject” to an existing loan).

The strategy has clear appeal when interest rates are high, but it comes with a huge asterisk: once a home has changed hands, banks usually have the right to recoup the loan — that is, demand that the mortgage balance of the seller is immediately paid in full. Even if the buyer falls behind on payments, the property could still be foreclosed on – ruining the seller’s credit for a home he or she no longer owns.

Despite this, Bill McAfee, president of Empire Title, said he’s seen an increase in customers wanting to change their title under these terms, and he’s warning both parties about what could go wrong.

“I’m not saying I agree with this, but it’s a way to get into real estate with very little money,” he said. “They need to figure out if it’s worth the risk.”