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Savvy Borrowers Are Straying from 30-Year Fixed Rate Mortgages
Borrowers are increasingly opting for less traditional loans like interest only and ARMs to increase long-term equity
Today’s affluent homeowners are moving further away from traditional 30- and 15-year fixed rate mortgages and instead are choosing less traditional products, like Option ARMs (adjustable rate mortgages) and interest-only mortgages to enhance their financial situations. This trend has started catching on among educated homeowners, who are following suit in an effort to better position their financial assets.
“The percentage of financially savvy clients who choose 30-year fixed rate mortgages is very small,” states Doug Roquet, a Certified Mortgage Planner with Home Loan Center of Washington & Oregon, a mortgage banking company and division of Netmore America, Inc based in Walla Walla, WA. “Most of my affluent clients prefer to leverage their debts with loan products that provide higher tax savings and more cash flow than a traditional 30-year fixed rate loan. But what we’re finding is that this trend isn’t just limited to high net-worth individuals. I’m seeing more and more everyday homeowners interested in the long-term financial benefits of leveraging alternatives to the 30-year fixed rate loan, like interest-only loans and adjustable rate mortgages.”
Fixed rate mortgages still comprise roughly 40 percent of the total loans closed in the U.S. Often considered the “grandfather” of mortgages, the 30-year fixed rate is frequently touted for its stability and reliability. The interest rate is fixed for 30 years, offering borrowers the consistency of the same monthly payment throughout the life of the loan. The only issue is that few borrowers keep their mortgages for the full 30 years. According to Steven Marshall, president of Strategic Equity, a Seattle, Washington-based company that provides high-level training for the mortgage industry. In in a January 2007 article in Mortgage Planner Magazine, he said “According to Fannie Mae, the average American mortgage lasts 4.2 years... Given these statistics, it’s difficult to understand why so many Americans continue to pay a high interest rate premium for a 30-year fixed rate mortgage, when they are likely to only use the first 4.2 years of the mortgage... Wealthy Americans, those with the ability to pay off their mortgage but refuse to do so, understand how to make their mortgage work for them.”
“A big part of being a responsible mortgage professional is understanding the risks and benefits of each product, and empowering the client with the education to make a sound decision,” adds Marshall. “Obviously, putting a borrower into a 30-year fixed rate, when they know that they’re moving in less than five years, especially when that 30-year product is more costly, is not acting in the client’s best interest.”
Adjustable rate, hybrid and interest-only mortgage loans offer the higher flexibility and lower monthly payments that may make more sense for many borrowers, particularly those not planning to live in the same home for 30 years. They free up monthly cash flow and liquidity to invest in other vehicles the same way many affluent homeowners choose to do. “If a borrower is capable of investing in an interest-bearing, compounding interest side account at a favorable rate, the savings realized by a less traditional loan like an adjustable rate or interest-only mortgage can be an excellent option,” states Roquet. “Savvy homeowners know this and are increasingly using less traditional loan products to leverage their equity as part of their investment strategies. What’s great is that we’ve helped even moderate income borrowers use these same principles to enhance their financial situations as well. Because of this, they’re funding their kids’ college funds and reaching their retirement goals sooner and more easily.”
There is no universal optimal choice of mortgage product and potential borrowers are advised to contact a knowledgeable and reputable mortgage professional who can evaluate their current financial situation, consider their goals and capabilities, and take these factors into account when advising about potential mortgage options. While many borrowers are attracted to the benefits of adjustable rate, hybrid and interest-only mortgages, which include easier qualification guidelines, lower monthly payments and higher flexibility, others are drawn to the consistent predictability of a traditional 30-year fixed rate.
“I take numerous factors into account when evaluating a borrower’s fit for a specific type of loan,” says Roquet. “There are far more factors than monthly payment and interest rates. I always consider the borrower’s spending habits, capacity to save, risk tolerance and future goals. A good loan choice is the one that works best for the specific borrower. Suitability is absolutely critical for the deal to make sense.”
Learn more about the author, Doug Roquet, CMP.
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