8 Loan Products — and Whom They're Perfect for

March 1, 2006

Helping buyers find the perfect loan involves more than matching a mortgage product to their income and risk profile. It also requires educating buyers about the options. Although the 30-year fixed rate may still be the mortgage of choice, here are some of the alternatives available from top residential mortgage lenders.

1. If the buyer needs a lower rate to buy but is scared of rising interest rates: Consider a 10-year interest-only loan that then automatically transfers into a 20-year fixed loan at the same rate, suggests Paul Fein, senior vice president, southeastern division with GMAC Mortgage. “Our loan gives people the chance to build some equity through appreciation before they have to start making larger payments, yet they get the stability of a fixed rate,” he says.

2. If your client is buying from a builder: Consider a loan with a longer interest-rate guarantee, suggests Fein. Homes are now taking longer to build, so the traditional six-month cap is now being replaced by loans such as GMAC Mortgage’s Builder Power, which offers 12-month rate protection.

3. If the buyer needs a year or two of breathing room before making full payments: Consider a fixed-rate loan with an initial interest buy down, suggests Joe Rogers, executive vice president and national sales manager at Wells Fargo. “Our Flex/Fixed program allows customers to take advantage of lower mortgage payments for one to three years. This temporary buy down can produce an interest rate lower than that of an ARM for a short period,” he notes.

4. If the buyer is in a high-appreciation market and expects to move in 10 years or less: “Consider an interest-only ARM loan with a longer amortization period, perhaps a 10/1 ARM,” says Rogers. Buyers will receive the benefits of rates lower than an amortized loan for a longer period than a 3/1 or 5/1 ARM can provide if interest rates are on the rise. However, Rogers cautions, home buyers need to make sure they give careful thought to their individual financial picture, since with an interest-only loan, you’re not building equity. That can be risky, especially if prices drop.

5. If cash flow is as important as building equity: Consider the option of seven- or 10-year adjustable ARMs, especially the flexible option ARMs that allow owners to make interest-only payments in months when they need extra cash. Consumers today are much more savvy about using their home as another financial management tool, says Tony Meola, executive vice president of home loan production at Washington Mutual. Although these intermediate-length ARMs may have slightly higher interest rates than shorter-term ARMs, their rates are very competitive with fixed loans under current yield spreads, he adds.

6. If you’re representing an investor who’s buying a four-plex: Consider an Alt-A mortgage, which offers loans at rates between prime and subprime for borrowers whose loan needs don’t neatly fit into Fannie Mae or Freddie Mac guidelines, says Meola. Now that a secondary market for these loans has been established, mortgagors are more willing to lend to investors who surpass the $400,000 agency loan limit, those with income and asset verification issues, and other borrowers who can’t easily qualify for conforming loans.

7. If the buyer is a firefighter, teacher, or police officer, or has an income at or below the area’s median: Consider the Neighborhood Champions, Community Commitment, or Acorn programs from or with Bank of America. These loans feature low or no down payments and flexible credit guidelines including consideration of undocumented income. In the case of Community Commitment and Acorn, the loans also offer interest rates at below market for the term of the loan. The programs aren’t new, but they have been tweaked with lower down payment options in response to consumer needs, says Mike Bradshaw, senior vice president and home ownership service executive at Bank of America.

8. If the buyer wants a traditional fixed rate but needs a lower payment: Consider newer fixed mortgages that run for 40 years, suggests Bradshaw. Equity builds more slowly, but the rate is secure. Bradshaw predicts that lenders will soon be offering more flexible terms that aren’t just 15 or 30 years.

Caution: Buyers need to be aware that some specialty mortgages come with added risk, such as large payment increases that come at the end of an introductory period. To learn more, read “Shopping for a Mortgage? Do Your Homework First,” developed by the NATIONAL ASSOCIATION OF REALTORS® and the Center for Responsible Lending. Order copies of the brochure, or download a free PDF version (in English or Spanish), at REALTOR.org.