“What is a mortgage, anyway?” This is a question I’ve been hearing quite frequently lately from your millennial population. As you may recall from your memory bank a couple weeks ago, I’ve been particularly interested and focused on human millennials and their entrance into the Earth-based home buying market for some time.
In my last post, I looked at millennials who decided to become home owners and how you—our credit union mortgage lenders—can help them initiate and realize their dream. Now that they’re in your sights, it’s time to answer their burning question of WHAT EXACTLY IS A MORTGAGE?!
This group of Earthlings is smart, so they do, indeed, generally know what a mortgage is. But for most of them, they struggle with that next level of understanding: the fine details and nuts-and-bolts of a mortgage loan.
They probably know the general idea behind a mortgage—they borrow money from a financial partner (that’s you!) to get a home. They’re coming to you because for a big decision like this, they want a human connection from their trusted credit union. (Being new to your planet, I’m learning how powerful that can be.) But that basic definition is where the understanding stops. So, what IS a mortgage and which type is best for them? Let’s take a look at the information you should share with your millennial members, including details around the most common mortgages and key differentiators of each loan.
Fixed Rate Mortgage: With a fixed rate mortgage, stress to your millennial that the interest rate never changes. They should know that fixed rate mortgages provide the security of a payment that doesn’t change. This can be particularly valuable information for those on fixed budgets.
Adjustable Rate Mortgage: Also known as an ARM, the interest rate of this mortgage adjusts throughout the life of the loan. The initial interest rate is fixed for a certain duration, which is generally about 3-7 years.
After the fixed period, the interest rate adjusts based on the current index rates and market. For example, a 5/1 ARM has a fixed interest rate for the first five years. After that period, the rate could be adjusted once every year.
If your millennial partner doesn’t plan to be in the house for longer than the fixed term, then an ARM could reduce the interest they pay. However, unlike a Fixed Rate Mortgage, the ARM rate may go up OR down at the end of the fixed period, and continue to adjust over the life of the loan.
Interest Rate: This is the rate that your millennial borrower is charged for using the credit union’s money to purchase their home. Interest rates are typically calculated annually and expressed as a percentage of the total funds borrowed. The interest rate is applied to the total unpaid portion of a loan. The lower the interest rate, the better it is for your member. Explain to them that it’s important, but it’s not the only factor to consider.
Amortization: This is a fancy word for the payment schedule over the lifetime of a loan, or how many years your member will be making payments until the loan balance is zero. Typical amortization schedules are 10, 15, 20 or 30 years.
Payment: While your millennial member probably realizes that this is how much they pay toward their loan balance, illustrate to them that it is directly related to the amortization period. In other words, if your member wants to pay the loan balance off more quickly, they can make higher monthly payments.
Escrow: The member’s payment may include an escrow account. This account is set up to hold funds used to pay their monthly home insurance and property taxes.
Frequency: This refers to how often they make payments. Nearly all mortgages are based on monthly payments.
Their Lender: While they’ve got options when it comes to types of mortgage lenders, I believe that home ownership is best accomplished through credit unions. Credit unions provide stability, as they are the institutions that develop long-term relationships with members through multiple financial offerings.
I’m confident that if you educate your millennial members with this information, you will be an interstellar home mortgage hero. After all, home ownership is out of this world, and you’re the atomic propulsion that gets them there.