My shoulder was sore by noon, and it’s all because I’m a Millennial. Let me explain: I was at a conference on marketing to Millennials for financial institutions, and almost every presentation started by asking all the Millennials in the room to raise their hand. Spoiler alert: over half of the room raised their hand.
This shouldn’t have come as a surprise to anyone – the fact is that Millennials are now the largest living generation in America. Every year, more of us are potential homeowners, and loan officers need to adjust accordingly. It’s time to stop treating Millennials like specimens – shocked by their very existence – and learn how to talk to them about home buying and mortgage interest rates.
Below are 7 tips that will help you educate and understand Millennial homebuyers before they make the biggest financial decision of their lives.
1. Understand where they’re coming from
There is no shortage of cover stories or think pieces that claim to have finally “cracked the code” of the Millennial, and they almost never tend to agree (e.g., Generation Nice vs. Me Me Me Generation). However, when talking about mortgage interest rates, Millennials are different from every living generation before them in a very specific way: they have grown up in a housing market with historically low rates.
Just like how the concept of car phones is foreign to Millennials, most have never known a market with more than a 5% interest rate. Rates have been so low lately that anything more than 4% can seem “crazy” by many potential homebuyers, according to a report by MarketWatch. Not so long ago, 4% rates were crazy good.
Here’s your task: If Millennials think 4% rates are high – and they’re already hovering around 4% and potentially rising – it’s up to you to forget your assumptions and advise them in a way they’ll appreciate and understand.
2. Millennials are living with their parents in record numbers and you can set them free
It seems everyone has an opinion about more Millennials living at home than any other generation since the 40s, but the most important thing for a loan officer to know is that 90% would prefer to move into their own home. However, only 15% of “old Millennials” (25 to 34) have more than $10,000 saved. It comes down to this: Millennials want to buy a home, and you can help them achieve that goal.
According to Down Payment Resource, 71% of first-time homebuyer purchases in August 2016 were made with down payments of 5% or less, which makes sense given most people don’t have enough saved to put more than that down on a home. There’s no shame in having less than 20% down; you’d actually be joining the majority of first-time homeowners.
Learn to sympathize: Millennials are right to be a bit wary about rising rates; changes in the interest rate will impact them even more than other generations since more people are putting down less money for a down payment. If they can close on a home before rates rise, it could translate into a lot of saved money – and less sharing laundry with their parents.
3. Show historical context
The monthly average interest rate on a 30-year fixed mortgage in January 2017 was 4.15, according to Freddie Mac. By itself, though, that number will mean little to your average Millennial first-time homebuyer – just like the price of gas will mean little to someone who doesn’t drive. Show them context with this list of interest rates through the decades:
- January 2018 – 4.03 (5.51 million existing homes sold in 2017)
- January 2015 – 3.57 (5.7 million existing homes sold)=
- January 2005 – 5.71 (8.3 million existing homes sold)
- January 1995 – 9.15 (4.5 million existing homes sold)
- January 1985 – 13.08 (3.8 million existing homes sold)
- January 1975 – 9.43 (3.0 million existing homes sold)
No expertise necessary: Looking at those numbers it’s easy to see that while rates have fallen below 4%, they’ve also been much, much higher. Historically, 4-5% is a low rate; while no one can fully predict the market it doesn’t take an economist to see there’s a lot more room for it to go up than to go down. Let Millennials see that for themselves.
4. Translate percentages into payments
While everyone knows a lower interest rate is better, it can also be hard to fully comprehend until it is translated into something more recognizable: cold hard cash (i.e. monthly payments). Just a fraction of a percentage point can cost your borrowers a large amount of money over the life of a loan. Show your borrower the difference between a 4% and 5% interest rate, and you can bet they’ll have a little more urgency knowing there’s more room for an interest rate to rise than to fall.
Show Millennials the difference between a 4% and 5% interest rate in terms of a monthly payment.
For example, using usmortgagecalculator.com, you can easily show your borrower how a change in rate can affect them in a real way. Of course you will need to include an APR in anything with an interest rate that you put in front of consumers; however let’s take a look at a basic example for illustrative purposes. Let’s say your borrower is one of the 10-15% of Millennials who have saved up $10,000 for their first home. With PMI that means they can afford a $200,000 home paying 5% down. If they buy soon, with rates hovering around 4%, monthly payments are about $1,312 with a total of $451,574.98 when it’s all said and done. Bump that up to a 5% interest rate and the monthly payments increase by more than $110 to $1,425.17. After 30 years the total amount spent will be $493,871.41, a difference of over $42K!
Lessons in time travel: Pretend it’s 1985 and put in an interest rate of 13% – watch them clutch their wallets in horror.
5. Educate on equity
If your borrower realizes that their rent is higher than their potential new mortgage – which isn’t as rare as many think – then the decision to buy a house is easier. If monthly mortgage payments will be higher than their current or previous rent, however, you should stress that the impact and benefits of homeownership go much deeper than the cost of monthly payments. For example, historically, home price appreciation and equity have led to significant increases in homeowners’ net worth.
36 is the magic number: In 2014, the Federal Reserve revealed that the net worth of the average homeowner is 36 times greater than that of the average renter. 36! Make sure you give your borrower a moment for that to sink in.
6. Show, don’t tell, with the buy now vs. wait calculator
A Facebook study showed that only 8% of Millennials trust banking institutions. After 2008, can you blame them? As one of the presenters at the Marketing to Millennials conference dramatically explained, “Millennials were reared in the shadow of 2008.”
Instead of fighting their distrust, use it to your advantage by giving them the tools to do the research on their own. This buy now vs. wait calculator lets them fill in the information on their own, and within minutes they’ll be able to see whether buying a home can actually save them money in the short and long term.
But wait, there’s more: It calculates not only rent vs. mortgage payments, but also how long one would have to wait to save 20% down and how much money they would lose to paying rent in the meantime.
7. The security of now vs. the uncertainties of the future
If buying a home is on the horizon, stress that waiting the years it may take to save 20% also means years of waiting on uncertain interest rate changes – not to mention fluctuating home availability and prices.
In a nutshell: Having the flexibility to buy now allows them to take control of their future and build equity now. Moving out of their parent’s basement or cheap apartment is just icing on the cake of homeownership.
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