With the selling season heating up, this is no time for you to freeze up if and when clients ask you about mortgage alternatives to the conventional 30-year fixed-rate term that up to 90% of homebuyers choose. With rates in flux, and about double what they were around this time last year, not everyone will rubber-stamp the 30-year, especially if they’re not planning on staying put for a long time.
When you’re asked what options there are for a mortgage over and above the most popular one, be ready to answer. Here are four choices you can recommend be considered.
Adjustable-rate mortgage (ARM)
An ARM starts with a rate that stays the same for a period of time, around three to seven years and usually below the current 30-year rate, before switching to an adjustable rate for the rest of the term. It will usually surpass the fixed rate if held long enough. A good choice for those who know they will be moving again in a few years.
Interest-only mortgage
Logical for people cash-poor after buying a house, this mortgage requires payment of the interest only for several years, after which the homeowner will begin to pay the principal, along with interest. Also worthwhile for those who expect to make a better return on other investments instead of beginning to pay off the principal immediately.
Jumbo mortgage
These are for those who need to borrow more than the conforming loan limits set by the Federal Housing Finance Agency (FHFA), with Fannie Mae and Freddie Mac under its conservatorship. For 2023 the limit is $726,000. Buyers will need a credit score of 700, which is significantly higher than for a conventional loan.
15-year fixed rate mortgage
Instead of paying mostly interest for the first decade or so of a 30-year fixed, homebuyers can begin to build equity in their home right away with this mortgage. Yes, the monthly payment is higher, but not crazy higher. For buyers in good shape financially the 15-year fixed can save a lot of money and is paid off in full twice as fast as the 30-year choice.
