Option Arm Minimum Payment vs. 30 year Fixed Payment

Have you ever asked yourself this question about a Pay Option Arm:

Why would someone want a low payment rate of 1.95% (or throw in a number) when they can get a 30 year fixed rate at (interest rate)%?

Before I answer this question, you have to figure out what exactly is your function as a Loan Originator.  Are you just an “order taker” or are you trying to get to know your clients for referral business?  Are you trying to be lower than your competition or are you offering good advice to your clients?   Is your business focused on the “now business”, “future business”, or a combination of both.  Of course, we would all like the combination, but is that really what you’re doing?  Only you can answer that question.

Now, let’s get to the question at hand…a low payment rate of 1.95% vs. 30 year fixed.  Most clients have one thing in mind when refinancing, lowering their monthly payments.  BUT, the only thing they know what to ask about a mortgage is “What’s your rate?”.  Generally speaking, if rate WAS THAT important, credit cards would not be at an all time high.  If payments WERE NOT that important, cars would not be financed for 60 months.  You may have a valid argument for me if you had zero debt, but it had better be a strong one.   But that’s another discussion all together.

Let’s talk real numbers.   Take a loan amount of $200k (if you want to use $100k, cut these numbers in half), a 30 year loan at 5.5% and a low payment rate of 1.95% {Taxes/Insurance not included}.   A 30 year monthly payment = $1135 and a 1.95% payment = $734.   That’s a $400 difference!   You tell me, if the client’s main purpose of refinancing is lowering their payments (if you don’t think it is, re-read the previous paragraph), do you think this would interest them?

At this point, I’m sure there are several of you asking:  wouldn’t you rather have a 30 year fixed vs. an Pay Option ARM?

Not necessarily.  Let me ask you this, if a 30 year fixed was SO GOOD, why are you refinancing again after 1 year? 2 years?  Once again, I’ll reiterate…PEOPLE ARE LOOKING FOR LOWER PAYMENTS BUT THEY DON’T KNOW WHAT TO ASK!  It’s YOUR job to educate them.  Hey, if you don’t want to take the time to do so, great, it’s your business.   But let me ask you this, isn’t it easier to close a deal with someone who tells you “Bob and Sue said you showed them how to save $400 a month, we’re looking to save $ also, can you show us?” as opposed to “Bob and Sue said you got them a good rate, we’re just shopping so can you tell us your rate?”

I’m sure I there are people screaming at their computer screen right now saying something about the potential Deferred Interest or Neg Am stuff.  To those people I would say to really look at that part of the loan in a totally objective manner.  You’ll see that Neg Am really isn’t that bad, if it’s truly understood.  Let me ask you this, if you freed up $400/month (using the example above) and your mortgage balance went up $200-$300/month, what’s the big deal?  Oh sure, if you didn’t do anything productive with the money, then we may have a conversation.   But if you did something productive with the cash flow, explain to me how that is bad?

People are scared of ARMs because they don’t want to be surprised with a new payment every year.   The POA has that challenge solved.  The payment can be accurately predicted for the next several years (check your lender to see how many) regardless of what the rate does.  That’s one of the safety features of the Pay Option Arm.