The Current State of Financing Options

Jamie and her guest, Maria Esposito from Citizens Bank, talk shop on creative strategies buyers can use when seeking the best financing options in today’s real estate market.

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Jamie: I am so super excited to be here today because I have my special guest on, Maria Esposito. Maria is not just a friend and a loan officer with Citizens Bank. Maria has been running one of the biggest teams at Citizens Bank for many years. Today I will be talking about where we are with financing and without further ado, hi Maria.

Maria: Hi Jamie.

Jamie: I'm dying to hear what you are seeing because you always have your pulse on it. So fill us in please.

Maria: When you say have rates gone up. Well, rates have actually been pretty level. They've been pretty steady since we began the year. Rates were a little bit lower as we ended 2023 and maybe the first week or two in January and then went up. But they've been pretty level and rates change every day or rates can change every day, I should say. Most lenders will put out a new rate sheet every morning and then depending on the lender and depending on what's going on in the market, those rates could even change intra daily. So I would say that the rates are a little bit higher than about as much as a half a percent higher in certain products than where the lowest was, let's say over the last four months. But for the most part, over the last two months they've been pretty level.

And from day to day they may go up a little down a little like that. So as a lender, I'm actually finding it much easier to operate this time this year versus this time last year because last year rates were swinging wildly. From one day to the next, they could vary as much as 1% higher versus lower. And it's really difficult to operate in that kind of environment. It's difficult for a client to determine whether to lock or not lock or to watch rates. The general consensus that I get with the customers that I'm speaking with is that rates are not really going to go much higher like they did last year, swinging wildly up and that there's actually maybe more of a propensity for them to come down some, right? The Fed keeps talking about how they're not raising rates, right?

They're expected to hold the Fed funds target rate level this month, but then maybe start to drop that come in May. So most economists are predicting that rates are going to be lower by the end of this year. And I do think that we're going to see pockets of it. We will have weeks at a time where the market will be doing something. Look, we're really getting into the election now too, and the jury's out on how that's going to affect things. I mean, typically in an election year, rates will improve anyway just because there's so much uncertainty.

Uncertainty in the world is good for interest rates because when you have uncertainty in one area, it causes a flight to safety, which is bonds. And when bond prices go up, mortgage rates come down. So that remains to be seen.

But I would say overall rates a little bit higher than where they started the year, but not egregiously higher. And if you catch the right day, if you're working with a great loan officer that is tuned into the market and watches that, you should be able to get good advice on when to execute a rate lock.

And certainly if you're working with a bank like Citizens or some of the other major banks in New York City that offer relationship pricing, that's the big ticket right now. If anybody is, and listen, we have a lot of wealth in our area, so we're really fortunate that we are working with customers. Over 50% of my customers are able to bring at least $200,000 over to Citizens Bank. And actually there's a higher percentage that can bring it over, but over 50% actually do bring it over. Anybody that's in that position to do that is going to get below market rates, right? They're going to get rates even lower.

I mean, I've locked several people in the last couple of weeks that with the relationship discounts, they're going to be in the fives, right? A rate in the fives, it's probably going to hold for a while. That's a really great rate, well below the market rate.

Jamie: And for that rate in the five, you had to transfer how much money and what did that bring it down to?

Maria: A minimum of $200,000. And listen, the more that you can bring over, the lower the rate. 200,000, maybe you're getting 5.875%, and for a million dollars, you're getting 5.5%.

Jamie: That's where you really benefit. I've been telling all my clients on the luxury end, I am seeing that clients are now taking mortgages even on the very high end market because they can move a million dollars over to a Citizens Bank, let's say, and then they get to get a 5% rate, and they're making more than that on their money. I mean anything in the 5's is going to be very valuable.

Maria: The other thing too is, and look, the folks on here, I know a lot of you work with all cash buyers or buyers that are able to put 50% down, really deep, down payments. And often times the conversations that I will have with them once they're brought to me is I'm like, Hey, you can put the 50% down. That's no problem. Obviously we love that. Or you can put 40% down, take that 10% you were going to put down, move that over, get the rate discount. And then at some point, if you ultimately don't want that large of a loan, you can always make a principal payment. You can have the mortgage payment recast. And we're just trying to find all of the creative ways where somebody can maximize and get the best financing option, but also achieve what their end goal is as well. And so it's a matter of being creative in that respect.

Jamie: Let's just say a 5 million purchase of a single-family home, a client will move over $5 million, they're spending $7 million and they're going to do 50%, and they're going to move $5 million over to you, what would their rate be?

Maria: Let me tell you what the discount would be, right? Okay. Whatever the base rate is. So let's say the rate on a seven year arm is six and a quarter percent and another one in an eighth percent lower. So instead of being six and a quarter, they would be at five and an eighth, right?

Jamie: And that person that's now moving $5 million over, they're probably somebody that knows that they're making more money than that on their own money, so why wouldn't they borrow?

Maria: Right. Yeah. I mean, we have money markets that are paying out or CDs that are paying out like five and a quarter, five and a half.

Jamie: I have an account at Fidelity, I got five and a half percent on it. I don't know if I still could, but in a particular point that I put it in there, you could you just jump in. I mean, it's really worth it. And I think it's smart what you just said before, which was I think it's a great idea to borrow less, to move your money, to be able to get the rates down. Because while I'll speak for you, you certainly can encourage people to open up accounts just to get the rate down and then move their money. But the fact is that they can, and sorry to say that, but it's true. So people can really get the benefit of this and not even have to stay there. The reality is, is that as a customer, I will tell you, years ago I had a Citibank loan and to get a better rate, I moved money over. I use it for certain stuff. I've never closed the account because you know what? You just don't. That's the thing. And so it is a way also to suck the customer in and if the service is fine, they're happy to stay. What's the difference?

Maria: Look, that's our pitch. And it's not just like my pitch. It's what all of the banks' pitches are. I always say, look, we ask you to bring the money here. There is no time limit that it has to stay. But I always ask my clients to at least give it 90 days. Let us show you that it's worthwhile to have a deeper relationship with Citizens than just the mortgage. And actually, I was on a call earlier today where I learned that mortgage is at Citizens, it's the number one part of the company...

Jamie: Number one, meaning in terms of gross revenue?

Maria: No, not in most revenue, but we bring in more deposits to the bank. If you compare us to business banking, commercial student lending, HELOC, it used to be home equity, but now mortgage has become the number one source of bringing money into the bank and that money is staying, the vast majority of the money does stay.

Jamie: Oh, you're not selling off the loans?

Maria: No, I mean the people that are bringing over money.

Jamie: That's great.

Maria: That portion of that is staying.

Jamie: Didn't you just bring on another department of that high-net-worth client base?

Maria: Yes. So basically what we're doing is, or what we have done, I mean it's still in its infancy stages, but a large contingency of First Republic bankers who chose not to go to Chase, came over to Citizens. And we are building our own private bank and I'm working very closely with them and helping that get set up, and it's been great, and it's been great for what I do as well because they've been able to help bring some of the stuff that was really great at First Republic is what we're duplicating over at Citizens. So I think just like from a customer experience, from products and pricing, it's just a win-win situation. We actually just announced a pricing enhancement, a pricing special that we're doing: we were saying for the next 60 days, but the reality is that it's going to probably be in perpetuity, but we're piloting it to see how it goes.

Right now, if you're buying an investment property or if you're buying a second home, and if you're buying a multifamily investment property, the interest rates on those transactions are much higher because there's the inherent risk of it being an investment property, multifamily, et cetera. But for our clients that are developing a relationship with the bank and with a $200,000 level or above, we are eliminating all of the pricing adjusters for those. So, if somebody comes to me now, if you have a client that's buying a four-unit multifamily investment property and they're putting at least 30% down and they're willing to bring at least $200,000 over to Citizens, they're going to get the rate as if it were a primary purchase, a primary family home.

Jamie: So that's a huge difference.

Maria: It's huge. To give you an example, the difference is instead of, let's say you're paying six and a quarter on a seven year arm on a primary home, an investment for family, you're paying seven and a quarter and paying a point. Well, now you're going to get that same rate six and a quarter of what you were paying on a primary home. So it's pretty big.

Jamie: You're bringing up multifamily properties, which is a really great thing to be hearing about the investment side because those are trading. Ten units and under are trading right now, and they're trading because they either have half rent stabilized, half free market. People are buying and using those properties to move into. If you're an owner and use it, it doesn't really matter if the rents are low. In fact, I'm kind of in the middle of a deal right now that may or may not go through because they signed with somebody else, which is interesting in and of itself to see people trying to flip deals again. My first comment to the broker was, "what do you think? This is 2006." That was my first thought to him when I saw this happening. So tell me, Maria, what is your top product people are going for right now in your earner of below 500,000?

Maria: So going back to the whole diversity comment and being able to service more than one type of client, more than one type of customer, I would say that we have on one end of the spectrum, first time home buyers, let's say they're buying up to something like $800,000 - $900,000, those loans tend to be more like 30-year fixed. We're partnered up with Fannie Mae, we're one of three lenders in our area that's offering a special product where they get a $10,000 closing cost assistance that they can either use towards closing cost or the down payment or to buy the rate down. So on that end of the spectrum with the first time home buyers, that's a really popular product right now. And then on the portfolio side or jumbo loans, anything that sort of falls outside of the box, if you will. I would say probably the most popular product right now is the seven year arm.

That means the rate is fixed for seven years. It's still amortized over 30 years. So they have a lower payment and the rate is a good half a percent or more lower than the 30 year fixed. It's an eighth of a percent lower than the 10 year ARM. It's an eighth of a percent higher than the five year ARM, but seven years is a long enough period of time that people feel safe. And they also feel like there's probably going to be a refinance opportunity that will occur within those seven years. And so therefore, let me take advantage and get a lower rate now on the seven year during the fixed rate period. And I'll probably be looking for that refinance to happen sometime within that period, or maybe they don't even think they're going to be in the home for seven years. That's another reason.

And along with that interest only, interest only mortgages have always been, I think, more popular in our area than maybe some other parts of the country, but I see more and more clients that are even coming without me telling them about what interest only is. They've become educated and they're saying, "Hey, do you offer an interest only product and would I qualify for that?"

Jamie: You guys were always big on construction loans. Is that still available?

Maria: Yes. And that's a portfolio product. So again, more popular would be the ARMs versus the fixed rates on those as well. Still with the same discounts. The construction loan rates are higher than a traditional mortgage rate. So we did have a nice little period of time where we were pricing them exactly the same. That's not how it is right now at the moment, but figure the construction loan rates are about a quarter percent higher than if you were buying. Let's say I'm buying a home and I want to renovate it and I'm going to get a purchase construction loan versus just a purchase mortgage, the difference in rate is about a quarter percent. But of course the other difference is that you're going to be able to get the money not only just to buy the property, but also to renovate it as well.

Jamie: And how does that money get distributed? Do you work directly with the contractor? Is it in phases? Do you have to visit the property? Can you tell us the step-by-step there a little bit?

Maria: Sure. I mean, the high level on that is that we give a 10% deposit on whatever the reno cost is. We give that at closing for your builder to get started with, and then thereafter inspections are done and you draw down on the remaining funds and the construction loan as work has been completed and inspected, and during the loan process, the money can go either directly to the homeowner or it can go to the builder. That's something that we collectively choose when we're processing the loan. I'll work with my clients and the builder to determine who.

Each project is a little bit different. Sometimes it's much better for the builder to be in control of it and calling for the inspections and getting the funds directly. Other times I will say "let's have you control it all and then we'll send you the money and then you pay the builder." But we don't give all of the money at once because remember the bank is in this with the customer that's doing the renovation, and you always want to make sure that you're not giving a contractor too much money upfront for work that has not been completed. They want to have some checks and balances in place to ensure that that project is on task and that things are getting done in a timely manner like they're supposed to.

Jamie: And in my experience, and I guess I'd love to hear if this is still the case, you can go in there and while it might be a little bit of a higher rate initially, once you go and do your full construction, it may not be worth it at the exact point in time when the work is done, but as soon as rates drop, even a half a percent, you could go in there, refinance that loan, take a lower rate for your payments, right?

Maria: Yes. Just like any other kind of mortgage, if a refinance opportunity presents itself, you can refinance that as well. But on the flip side, if by the time your reno is don­­e, if rates are higher, you don't have to worry about that because at least with our construction loan, you lock in the rate at time of application. So we've had some folks that, let's say the construction loans I did during the pandemic that didn't finish until after rates rose. Those people are locked in at 2%, 3%, 4% rates upon completion of their project and didn't have to go to market rate. So it could work on either side. But yes, if rates are higher, or excuse me, if rates are lower by the time the project is done or anytime thereafter, we can look at doing a refinance. And many construction loans do.

They don't have to, but they tend to. A refinance will happen at some point in time, but that's like with every other mortgage. I mean, the vast percentage of mortgages that are made, the average life of a mortgage has not been greater than seven and a half years since the year 2000. So most loans are either getting paid off or they're getting refinanced within a seven and a half year period, and that's been as low as 18 months. There was a time period when mortgages were only lasting about 18 months. And I think that we're going to see that.

I think if rates do come down to 6%, and when I say come down to six, I mean the 30 year fixed comes down to six, which means that the arms are now in the low fives. I think that we're going to see a spike in refinances for people that closed in the last couple of years, because you had people last year that closed with rates above 8%. I've had one person already that was able to refinance just from last year to this year.

Jamie: I think it's a great point, and I think it really is every reason why people should not be afraid to take out a loan right now. I think it's really, really important, and I think that the tough part is for those of us out there like myself, who still has a two and a half percent on my primary, it's a tough pill to swallow, and what it's doing to that market, is it's making people stay in their houses longer than they might have.

Maria: Hence the inventory issue that we have.

Jamie: Exactly. But what's going to ultimately happen is, like anything else in life, you get to a point of supply and demand, and out of sheer necessity, sometimes people just don't have a choice. I do have clients moving to bigger places that financially they're not in a position to necessarily be paying higher than their three and a half percent that they currently have, but out of necessity, that's where they're going to have to make a compromise. For your home, people make that compromise. So, instead you might cut back on the extra steak dinner.

Maria: Right. There's a lot of activity going on in the market right now that already feel like we in the spring market. I still see a lot of contracts coming in over ask, right?

Jamie: Bidding wars. I've had bidding wars.

Maria: Yes. I see that on a weekly basis for sure. There are buyers. There are a lot of buyers out there. I think it's a matter of capturing them, and I think going back to the very beginning of the call when I said that rates are more stable right now more than anything, I think that stability has really helped with getting some folks that were on the fence about putting in an offer. Some people were, I think, waiting for rates to plummet. Others were like, oh, rates are way too high. Right now with them being in the 6s....I mean, that is not a bad rate folks. Some of us have 2% and 3% rates, but in the scheme of mortgage rates, 6 has been more the average than it has been either high or low

Jamie: How about this? How about giving thought to the fact that there was no interest rate on your money in the bank while we were all taking out 2% and 3% and 4% rates. Now you can take your money, put it in the bank, and still to this day be getting 5%, even 5.5%. And if you can go get a mortgage for 5.5%, then what is that really costing you at the end of the day?

Maria: Right, exactly.

Jamie: I think the consistency of consistently seeing rates not have these huge fluctuations too quickly, I think that consistency alone will bring borrowers more into the market. People that believe in what they're hearing from some of the biggest forecasters in finance right now, they believe that rates will come down at the end of the year. So then what is that going to do to the market... whether or not they do come down? It's going to push people into the market because what's going to happen is, if they believe rates are going to come down, they're going to be looking this summer, they're going to be looking this fall, they're going to be planning on closing as rates come down. By the point they get there, if rates aren't down, that adjustment on making that move has already happened.

Maria: I think too though is that something that the agents listening can really be selling or impressing upon the customers that they're working with is... Look, if rates do come down by the end of this year and that's going to create a bigger pool of buyers, we're not necessarily going to have that much larger a pool of inventory. So if you're working with somebody that really needs to move, maybe they want to get into a school district so that their kids can start school in the fall, they need to be buying now, right? People always say, anybody who's ever tried to time the market fails at that. I always tell people the best time to buy, because I get asked that question all the time, Is now the best time to buy? I'm like, the best time to buy is when you are ready to buy, is when you have a need and you qualify, and if you see something when you walk in and you're like, oh, yeah, this is my home. This is the home that I want, then it's the right time to buy.

Jamie: Not to go off topic here for a second, but if you are a cash buyer right now, now's a good time to buy. You're going to get a better value at that below million mark, if you can do it. Just like at the high end, I think if you're in the luxury market, you're buying something for $4 million and up, I think it's a good time to borrow.

Maria: It is. It is for sure.

Jamie: I think you could borrow for less than you're making on your other money.

Maria: By the way, there's more inventory in that space too.

Jamie: Correct. That's the other thing. Of course.

Maria: Probably negotiate a better deal there as well in that space.

Jamie: Correct. Wow! We learned that it's actually quite a good time to finance for Maria Esposito, and we also learned that Citizens Bank has added another piece to their business, so to speak, where they're talking about the business banking. So I myself will be looking into that piece of it, and thank you all for being here, and I look forward to seeing you soon.

Important Links

• Citizens Bank