We have talked at length about the marketing of loans, and nowhere does marketing come into play more than in the various loan types. Consider this example:
I will suggest that you get 10,000 people together, all with similar demographic characteristics, such as age, income, creditworthiness, and so forth. Let’s consider three big lender types in my state, California. Big banks usually offer ARMs tied to a 6-month CD index to T-bills, S&L Associations offer ARMs tied to the 11th District Cost-of-Funds, and, finally, credit unions usually specialize in fixed-rate loans. Each type of institution, however, has a one-size-fits-all philosophy. “Our loan is perfect for you!” the rep will say. It may be easier to train the sales staff to sell a single product, but in my view, that’s a patently absurd approach to the market.
So here are three groups of people who have a similar breadth of characteristics and yet all of whom walk away from the closing table with loans that have significantly different performance characteristics. Bizarre! At any point in time, one of those loan types is definitely preferable to the others. The two-thirds who get the other two types of loans are making big mistakes that will cost them lots of money.
Consider, too, that individuals within those groups ended up with the same loan type regardless of any consideration that their goals were different, meaning that the first-time homebuyer got the same loan as that of the retiree. Again, this is an absurd situation, one you will want to guard against.
The conclusion that you must come to realize is that once those people walked into those institutions, their fate was predetermined. Each of those institutions just plain disregarded the needs or goals of their borrowers, sold them whatever type of loan that institution pushed. While reading this article, you should therefore be particularly sensitive to your personal needs and goals so that you can select the type of loan that will suit you precisely.
In the following discussion about loan types, remember that each of them has different performance characteristics, meaning depending on economic fluctuations over the coming years, borrowers of identical sums will pay different amounts of interest. When you choose a loan you are choosing a path. You want to make sure that path gets you to your goal, not someone else’s goal. The following are broad categories of generic loans currently available as conforming FNMA/FHLMC loans, those less than the limit (currently $300,700) and jumbo loans, those greater than $300,700.
Again, these are just the broad categories. With specific differences, there are probably 300 or 500 different loans. Let’s look at it from the lender’s perspective to understand why the industry offers so many choices.
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