Ensure your clients know the basics.

As a mortgage professional, you know just how important finding the ideal loan type for each borrower’s specific financial situation and goals can be. The only problem? Your clients probably aren’t quite as clear.

 Unfortunately, the average consumer knows very little about personal finances in general. That may be especially true when it comes to homeownership and available home loan solutions.

 That means you’ll want to prioritize financial education during borrower conversations by focusing on clear communication, using relatable analogies, visual aids, and straightforward language to break down complex concepts, or providing access to online resources or tools that help borrowers enhance their understanding. They’ll be pros before you know it!

 So, let’s dive into some of the most common borrower questions surrounding loan types and their comprehensive answers:

“What is a Fixed-Rate Mortgage?”

First things first, you’ll want to explain each loan type in depth. Start with fixed-rate mortgages, as they’re simpler and typically a bit easier to understand. Even so, remember to convert all complex concepts to layman’s terms!

 A sample script might be:

 “A fixed-rate mortgage is a home loan in which the interest rate doesn’t change. The rate is “fixed”, or the same, throughout the entire life of the loan. For example, let’s say you take out a loan with a 5% interest rate tomorrow. In 10, 20, or 30 years, your rate would still be 5%.”

 Clarify that this is the case no matter how the economy changes or evolves. It probably makes sense to wait on the refinancing discussion, too. For now, just explain that the interest rate doesn’t change with a fixed-rate mortgage.

“What is an Adjustable-Rate Mortgage?”

Once they’ve got the concept of a fixed-rate mortgage down, you can jump into an adjustable-rate mortgage (ARM) As they’re a bit more complicated than a fixed-rate mortgage, you’ll probably need to spend some more time clarifying here.

 A sample script might be:

 “An adjustable-rate mortgage, or ARM, is a home loan in which the interest rate changes over time. The rate goes up or down (adjusts) in accordance with economic benchmarks. For example, let’s say you take out a loan with a 5% interest rate tomorrow. In a year, it could jump to 5.5%. A year later, maybe it drops to 4.5%.

 There are typically caps on how much a rate can change in a given period of time, but regular changes are a part of life with an ARM.”

 Remember that many clients have trouble conceptualizing the impact of interest on their mortgage payments. It might help to run some numbers with them, to really drive the meaning of an ARM home loan.

“What’s the Difference Between a Fixed-Rate and an Adjustable-Rate Mortgage?”

As their understanding grows, clients will begin to see the differences between fixed-rate and adjustable-rate mortgages.

 You can bolster this understanding by comparing the math between the two. Create a hypothetical scenario with a fixed-rate and an adjustable-rate mortgage. Run through the numbers side-by-side to illustrate just how critical interest rates can be.

“How do I Choose Between a Fixed-Rate and Adjustable-Rate Mortgage?”

It’s a fair question, and one clients are sure to rely on you for. While the answer may be immediately obvious in some situations, others might require you to walk through the options with the client.

 To help them make the very best decision, go through the pros and cons together. You can even print out or email the sections below, so they can take the information with them and think about it.

Fixed-Rate Mortgage

Pros include:

• The interest rate will not change over the life of the loan.
• Budget-friendly. Owners will always know how much their monthly mortgage payment will be.
• Owners are protected from any extreme changes in home interest rates.

 Cons include:

• Qualifying can be more difficult. This is especially true if interest rates are high.

Adjustable-Rate Mortgage

Pros include:

• Potentially more affordable. Usually less expensive than a fixed-rate mortgage, at least for the first few years of the loan.
• Qualifying can be easier. Some buyers might only be able to achieve homeownership with an ARM.

 Cons include:

• Budgeting challenges. The monthly mortgage payment amount may change on a regular basis.
• ARMs are typically more complicated than fixed-rate mortgages.

 If clients still seem anxious, explain that there is no one right answer. The ideal loan type will depend entirely on their unique situation and goals, and you’ll be there to answer any questions and counsel them through.

“How do I Get Approved for a Fixed-Rate or an Adjustable-Rate Mortgage?”

Once they’ve made a decision and are ready to dive in, walk through the approval process together. Remember that borrower education means more involved and empowered clients, so take some time to explain each step in depth.

 Encourage them to:

• Gather financial documents, such as proof of income, employment verification, credit history, etc.
• Choose a lender that offers their loan type of choice. Explain your role in the process as well as some of the benefits of shopping around.
• Submit a pre-approval application. Detail the documents they’ll need to provide and, of course, discuss their credit score.
• Wait for the pre-approval decision. Explain that you’ll be there to help, no matter the outcome.
• Review the terms. Clarify that, when approved, it's essential to fully understand the terms of their mortgage and that you’re happy to help them with this.

Fixed-Rate and Adjustable-Rate Mortgages: Everything Clients Need to Know

When educating borrowers on loan types, you’ll need to employ a unique blend of expertise and communication skills. By mastering the art of explaining intricate concepts like fixed-rate and adjustable-rate mortgages, professionals like yourself can empower current and potential clients to make informed decisions that are best aligned with their financial goals.

 Clear communication is the cornerstone of a successful borrower-professional relationship, and it begins with our ability to simplify the complex and provide actionable insights!

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