Time and time again we see this happening.  People tend to end up going to one kind of an institution or another.  Some credit unions are pretty much a "fixed rate shop" and most credit unions do not have employees who are adept at explaining complex loans to their members. 

Typically between 90% and 95% of their loans are 30 year fixed rate loans.  When you go into a big S&L like a big portfolio lender, you'll find that they have a “one size fits all” philosophy. “Our loan is perfect for you!” they say.  It may make it easier to train the salesmen to sell one product but, in my view, that’s a patently absurd approach to the market. Yet the result is that 75% of their customers end up with one.  This goes on all pretty much regardless of where we are in the business cycle too.

The lenders are really selling two things - money and insurance. There is a basic price for money on any given day. The cost of the money is what they have to pay their depositors or what they can sell the loan for.  The insurance part of the price is what you pay for insurance against some kind of risk. That’s the money part. The more risk the lender perceives, the more you’re going to have to pay.  It’s that easy.

For example, if a prospective borrower has a poor credit history, the lender perceives that he has a greater risk of not getting his money back so the risk part of the price goes up.  At higher Loan-To-Value (LTV) ratios, there is less collateral to protect the lender so the rate goes up.

This obviously works with time too.  If you ask the lender to guarantee your rate for 15 years, he’ll give you a price.  If you ask for another 15 years of protection, 30 years total, he’s going to add an extra “premium” equal to what he perceives the additional 15 years of rate protection will be. You can conclude that the 30 year fixed rate mortgage would then have to be the most expensive product the industry offers.  You’re right.  If you have a $200,000 30 year loan, and if you’re only going to be in your home an average amount of time, say, 7 years, you paid extra money for 23 years of rate protection that you didn't need.  How much is that.  Well, the industry offers loans which are fixed just for 7 years and they are priced about ˝ below the 30 year fixed rate loan. On your $200,000 loan, that ˝% was $1,000 per year.  Choosing a 30 year loan instead of a 7 year loan cost you $7,000. 

So the easiest of those “risk adjustments” you can avoid is to buy the “insurance” only for the amount of time you are going to be in the house.  If this seems simple to you, I will tell you that there are millions of people who didn’t “get it.”  They will only be in their current home for 5 or 6 or 7 years but they have 30 year fixed rate loans. If you’re one of them, I don’t want you to feel badly because when you made that choice, you just didn’t have someone like me to explain it to you.