Q: Dave, I see more prospects asking about adjustable rates in the past several months. Should I be focusing on selling more adjustables? –Sally from Kansas
A: While the number opting for adjustable rate loans has increased, I don’t see this as a major segment of the markets presently–especially now that rates have stabilized at a pretty low rate.
When rates are rising, yes, more will opt for adjustables. However, when rates stabilize at a level that is historically low, they lose their momentum as fixed rates will still look attractive to most.
I can remember rates from 8% to 13% in the olden days, and thus adjustable rates dominated the market with as much as three-quarters of applicants making that choice. Today, we are at a much lower rate. Plus, with the Fed raising short-term rates to the point that the yield curve has become flat, or even slightly inverted, the spread between fixed rates and adjustables are pretty narrow in most cases.
That does not mean that some would not benefit from the use of an adjustable. Thus, the important thing is you need to realize when a customer might benefit from an adjust-able versus a fixed. Many times they will.
The question is–who might benefit? Clearly, those who are going to “use their home loan” for a shorter period of time will benefit the most. Note that I used the term “use the loan” instead of the usual “be in the house” phrase. That is because someone can stay in the home and refinance or leave the home and keep the loan while turning it into an investment property.
As rates rise, the possibility of a future refinance out of an adjustable becomes more probable, but less probable if they hold a fixed rate loan. There are specific situations in which someone may know they will be in a home for a short time–such as a planned relocation. Even refinances can become more probable with events, for example, when major renovations are going to be made. These renovations are likely to increase the need for cash and also increase the value of the home which can make a refinance to get rid of mortgage insurance and/or pull out equity more likely.
Keep in mind that these are not the only factors. Some clients are completely risk-adverse. Others understand that the lower rate they can get with an adjustable may enable a benefit that exceeds the risk. How to measure this? You can’t predict the future, but you can lay out future scenarios. That is what we go over in our “Comparing Mort-gage Options” course, as becoming an expert in determining the best option for clients is an essential skill for those who want to become experts. Dave
Dave Hershman is Senior VP of Sales of Weichert Financial and the top author in the mortgage industry. Dave has published seven books, as well as hundreds of articles and is the founder of the OriginationPro Marketing System and Mortgage School – the online choice for expert mortgage learning and marketing content. His site is www.OriginationPro.com and he can be reached at email@example.com.