Your Roll is Limited But Important:
Though a real estate agent will refer their homebuyer clients to a mortgage professional, inexperienced buyers will have questions in your first meetings.
Your ability to explain the two most basic mortgage types will be appreciated and give the clients more confidence. The purchase of a first home is a daunting process. Help your clients with basic information and they'll appreciate it.
The Fixed Rate Mortgage Option Provides Stability:
With a fixed-rate loan, the monthly payment of principal and interest never change for the life of the loan. Property taxes may change and so might the homeowner's insurance premium part of the monthly payment, but generally with a fixed-rate loan payments will remain very stable.
Fixed Rate Mortgages Come With Variety:
Fixed-rate loans are available in all sorts of shapes and sizes: 30-year, 20-year, 15-year, even 10-year. Some fixed-rate mortgages are called "biweekly" mortgages and shorten the life of the loan. Payments are made every two weeks, a total of 26 payments a year -- which adds up to an "extra" monthly payment every year. Making an extra payment per year reduces the yearly terms of the loan substantially and can save thousands in interest.
More Interest Paid Early in a Fixed Rate Mortgage:
During the early amortization period of a fixed-rate loan, a large percentage of the monthly payment goes toward interest, and a much smaller part toward principal. That gradually reverses itself as the loan ages and as one applies extra principal payments each year.
Adjustable Rate Mortgages or ARMs Adjust Based on an Index:
Generally, ARMs determine what must be paid based on an outside index, perhaps the 6-month Certificate of Deposit (CD) rate, the one-year Treasury Security rate, the Federal Home Loan Bank's 11th District Cost of Funds Index (COFI), or others. They may adjust every six months or once a year.
Rate Caps in an Adjustable Rate Mortgage:
Most programs have a "cap" that protects the borrower from their monthly payment going up too much at once. There may be a cap on how much the interest rate can go up in one period -- say, no more than two percent per year, even if the underlying index goes up by more than two percent. There may be a "payment cap," that instead of capping the interest rate directly caps how much the monthly payment can go up in one period. In addition, almost all ARM programs have a "lifetime cap" -- the interest rate can never exceed that cap amount, no matter what.
Differing Periods for Rate Changes in ARMs:
ARMs often have their lowest, most attractive rates at the beginning of the loan, and can guarantee that rate for anywhere from a month to ten years. You may hear people talking about or read about what are called "3/1 ARMs" or "5/1 ARMs" or the like. That means that the introductory rate is set or fixed for three or five years, and then adjusts according to an index every year thereafter for the life of the loan. Loans like this are often best for people who anticipate moving -- and therefore selling the house to be mortgaged -- within three or five years, depending on how long the lower rate will be in effect.
Why Choose an Adjustable Rate Loan?:
One might choose an ARM to take advantage of a lower introductory rate and count on either moving, refinancing again or simply absorbing the higher rate after the introductory rate goes up. With ARMs, one does risk rate increases, but could also take advantage when rates go down by pocketing more money each month that would otherwise have gone toward the mortgage payment.
