Elyse Umlauf-Garneau is a Chicago-based freelance writer and former senior editor with REALTOR® Magazine.
Arm yourself with mortgage know-how and improve your client service.
July 1, 2005
With the explosion of loan options, it’s become increasingly challenging to keep up on the newest mortgages. While your job as a real estate professional doesn’t require you to help your buyers get financing, clients often look to you for guidance on their mortgage options, including matching them with a mortgage broker.
For practitioners, maintaining strong relationships with loan officers often can salvage deals and improve client satisfaction.
“Real estate practitioners have a plethora of issues they need to deal with in a transaction and it’s unrealistic for them to be experts in mortgage products,” says Joe Rogers, executive vice president and national sales manager for Wells Fargo Home Mortgage in Columbia, Md. “But they certainly should be conversant and educated on the topic.”
Rogers says that not only have new mortgage products expanded, but so have consumer choices in terms of what documentation buyers choose to provide, payment options, and loan terms, among other things.
Shelley Armato—CEO of MPower Mortgage Services, a real estate company, mortgage company, and mortgage school based in Kansas City, Mo.—agrees that knowledge is key. She says she’s walked in on a couple’s screaming match about the purchase of an $800,000 property. The husband feared fixed, high monthly payments on a 30-year fixed mortgage.
Armato suggested an alternate mortgage product that would provide flexibility and allow them to comfortably manage the payments. Her knowledge essentially saved the deal.
Thomas Tinucci, a mortgage broker with R.O.C. Financial Inc. in Chicago, stresses the importance of salespeople developing “go-to” mortgage experts they can trust and rely on in a pinch.
He recently helped salvage a sale by engineering a mortgage within two days when a lending company changed its mind about extending credit to one of James Moser’s buyers. Moser, a salesperson with Coldwell Banker Residential Brokerage in Chicago, was one of Tinucci’s long-time clients. “If buyers go through a deal and the financing is a nightmare, it ends up reflecting poorly on the real estate professional,” Tinucci says.
Here’s a brief rundown of some of today’s most popular mortgage vehicles and information on the types of buyers who would most benefit from them. Following the list are links to additional information where you can learn more about these and other mortgage products.
Fixed-rate mortgages: Principal and interest payments are fixed for the life of the loan, be it 10, 15, or 30 years.
- Possible candidates: Those who want regular payments; plan to stay in a home for a long period of time (five years or more); and want to lock in interest rates while they’re very low.
Adjustable-rate mortgages (ARMs): Lenders offer multiple ARM products and some loans, called hybrids, provide fixed-rate terms (typically three, five, seven, or 10 years) that become adjustable when that term ends. For instance, with a 5/1 ARM, the fixed period lasts for five years and adjusts annually thereafter. “These products aim to combine the best attributes of fixed and adjustable loans,” says Doug Perry, senior vice president of Countrywide Home Loans Inc. in Calabasas, Calif. Interest rates and monthly payments typically are lower than those of a fixed-rate mortgage, but can adjust up or down at the end of the rate term, depending on the type of ARM it is and what financial index the loan is tied to.
- To make ARMs even more consumer-friendly and flexible, some lenders offer products that feature flexible payment options—minimum payments, interest-only payments, and 30- or 15-year payments (which allow borrower to pay off the loan as if it were on a 30- or 15- year schedule).
- Possible candidates: Those who want to maximize buying power; desire smaller house payments to pay off other debts or spend dollars elsewhere; want lower monthly payments for the initial period of a loan; expect to move or refinance before initial rate ends; or expect income to rise in coming years.
- Tinucci has found that 5/1 ARMs (where the rate is fixed for the first five years, and then becomes an adjustable-rate mortgage in the sixth year) work well for many of his first-time Chicago condo buyers. “First condos usually are stepping stones to bigger places and many of my first-time buyers are transient. Lately, many have been staying in their place for just a few years and then moving to the suburbs once they have kids. That’s when I might think of a longer-term—maybe a fixed-rate—product for them,” he says.
Interest-only loans: Payments consist of only interest for the first five to 10 years of the loan. After the interest-only period, borrowers have 20 to 25 years (depending on the loan terms) to pay off the principal plus interest.
- Possible candidates: Buyers who want greater short-term cash flow; intend to refinance or move within a few years; want to qualify for a more expensive house; have irregular cash flow (real estate practitioners, for example) or income that is tied to bonus income; live in rapidly appreciating areas; wish to divert extra cash to other investment property, retirement funds, etc.
- Tinucci says interest-only loans are a hot product because borrowers have the option each month of making an interest-only payment or also of paying down principal. “It’s good for people with fluctuating incomes. When it’s famine time, you pay interest only and when it’s feast time, you pay toward principal.” Some of the dangers of this type of loan are that if you only make interest payments, the principal does not decrease so you don’t build equity unless the home appreciates; and you could potentially end up owing money when you sell if the house doesn’t appreciate. Also, at the end of the fixed interest payments, you have to start paying the principal, pay a lump sum, or refinance.
No downpayment loans: Allows financing of the entire purchase price of the property, plus closing costs.
- Possible candidates: Those with good credit but little savings; first-time buyers who have trouble saving a downpayment; those with money tied up in investments they don’t want to liquidate for a home purchase. The downside of this type of loan is that you will pay higher interest rates because of the higher risk of these loans. You also have to factor in the monthly cost of private mortgage insurance.
Low downpayment loans: Allows a low 3 percent downpayment that doesn't have income restrictions or first-time homebuyer requirements.
- Possible candidates: Those with good incomes but limited savings; those who want a larger mortgage to buy a bigger home; those who want the downpayment to come from personal savings, gifts, or loans from relatives or others.
- Perry notes that low downpayment options are helpful to borrowers in rapidly appreciating areas, such as California. “Many people are diligent savers, but they’re unable to save at the same rate of appreciation. It’s where these loans come into play and help fill a gap.”
Reverse mortgages: Elderly or retired property owners can tap their home equity for expenses and increase their monthly income; rather than paying the lender a monthly payment, the homeowner receives money from the lender; mortgage is repaid from the home’s equity when occupants sell the property, move out permanently, or die.
- Possible candidates: Senior citizens over the age of 62 who wish to stay in their home and use the equity for things such as living expenses, medical expenses, home repairs, long-term health care, and other expenses. It’s often an option for people who are house-rich but cash-poor.
Experts expect that mortgage products will continue to evolve to keep pace with consumers’ changing needs. “Things happen so quickly in the mortgage industry that you could learn everything today, and some guideline will change tomorrow,” Perry says. “Learning the products isn’t something that is done once, but it’s an ongoing process.”
Perry emphasizes that rapid change in the industry makes it especially important for lenders and real estate practitioners to work in tandem to be the best mortgage matchmakers for buyers. “Lenders need feedback about consumers’ needs and real estate practitioners need to understand the solutions we can provide,” Perry says.
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