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Prior to 2008, adjustable-rate mortgages (ARMs) were easily discussed with borrowers from a loan officer’s perspective. Today, a lender must be careful when suggesting the option of an ARM for various reasons. In the past, we expected home values to increase and borrowers assumed the lower rates of an ARM product to be a better choice, although fixed-rates were still good.
I knew many loan officers who did not know how to perfectly describe how an ARM product works, much less explain it to the unsophisticated borrower. I am not saying that an ARM was not financially a good choice because I personally used them to finance homes. As a loan officer, I was able to time the market, keep my closing costs low and shop the lender with the lowest rate because it was my mortgage.
Today, we have fixed-rate mortgages (FRMs) at historically low levels, and my suggestion to a loan officer would be to truly understand the borrower before you suggest considering an ARM. The majority of borrowers will say they want a FRM at the beginning of the conversation, but the loan officer should be able to illustrate the benefits and defend or explain the mechanics of an ARM.
I would rather give the borrower the FRM they want, rather than convince them that an ARM is financially superior to a fixed loan. Sure, we are loan officers and not financial planners, but telling them that after the fixed period of five-, seven- or 10-years they can refinance or sell the home does not make me feel comfortable. If the borrower does indeed want to save money on their monthly payment by opting for an ARM product, it’s likely they will not add the savings to the principal amount without fail each month.
Loan officers today receive e-mails that suggest that now is the time to sell ARMs. The key points are: Debunking ARM myths, why savvy borrowers choose ARMs, educating and qualifying your borrowers and how to use ARMs to grow your business. My point is this: If you have not figured out the borrower yet or you are not educated on these products, then keep it simple, otherwise you risk losing a client.
Ron Aguilar is a licensed loan officer (NMLS#: 201859) with SGI Mortgage in St. George, Utah. He may be reached by phone at (801) 599-8526 or e-mail [email protected].