So if it’s not always about the rate then what is it about?
You see it daily from banks, lenders and mortgage brokers. Come see us and get the lowest rate. Or they will have an extremely low rate for a period of time and then your rate will increase. You need to ask yourself “is this a good deal for me? I can confidently state it is probably not – especially if you just took the deal because of rate.
Borrowing a line from an old TV show “What you talking about Willis” let me explain.
There are basically 2 types of rates when you get a mortgage. Those are variable and fixed.
Variable will flucuate with the prime rate. This basically means your rate could increase or decrease throughout the term of your mortgage. The fixed rate will remain constant throughout the term of the mortgage.
So for example the average lender is offering 65 BPS off the banks current prime rate. At present the banks/lenders prime rate is 2.85 – there fore your initial interest rate will be 2.2%. The fixed rate (using the current 5 yr fixed lender rates) are running as low as 2.54% and will not change for 5 years.
So your first question should be “Does this product have all the bells and whistles or are there restrictions?”
You will also notice that certain banks are offering a low introductory rate for 9 months and then your rate will increase for the following 39 months. There are other banks/lenders offering employee rate deals, low rate deals etc. Again what is the cost to you as a consumer? These banks/lenders are in the business to make money so what is the catch?
While rate is important you need to know what the other options/restrictions come with the mortgage you are signing for. You need to be thinking about pre payment options, penalties, can I pay off my mortgage early and if so what are the restrictions, is it portable/assumable, what are my payment options etc. When you buy a car do you just take the first one you see and not ask what the options are? Of course you don’t – so why would you do it for the most major purchase in your life?
Consider this. The average homeowner will do something with their mortgage every 36 months. This could be a refinance to renovate/pay out debts. A new job opportunity may come up where you need to sell and move. The family may grow and you need a bigger home. There are numerous reasons why we need to break a mortgage but if we had asked the right questions the cost could be acceptable. If we did not ask then the cost could be tremendous and your options limited to none. This all comes down to the penalties and the differences that each lender has when calculating the penalties. Check out my blog here in regards to the difference between lenders. In the article you will notice that the penalty ranges from around $3800 to over $11000. Which one would you want?
So let’s do an example of rate difference to show how little it changes your payment but remember the lower rate could cost you a significant amount to break your mortgage. We will use a 200k mortgage amount. We will compare average lender rate, quick close rate (normally have to close 30-45 days), low start rate/increase after 9 months. We are going to base it on mortgages that have all options available. (basically all the bells and whistles) At present employee pricing and teaser rates are nil and none existent plus normally a broker can match or beat these rates with much better options.
A mortgage payment at 2.69% equates to $914.97 and at 2.59% your payment would be $904.92. So as you can see there is little difference. After 36 payments your balance would be around $182435.59.
So you decide that you need to break the mortgage. We will use the initial 2.69% rate and show the difference between a bank product and a mono line lender. (as we stated each lender/bank uses different rates etc to calculate the penalties). We picked a current bank and current mono lender and punched in the numbers on their web sites. If you had taken this mortgage 3 years ago at 2.69% the penalty today would be around $6600 on the bank side and around $1250 on the mono lender side. So lets say you had 2.59% with the bank initially – do you think a savings of $10.05 per month is worth the risk? You will have paid $361.80 more in payments BUT you will pay $5350 more to pay out the mortgage. Is it worth it? Of course it’s not.
Now let’s look at the 9 months initial low rate product. Using 200k you will have a mortgage payment of around $845.94 using 1.99% rate. After the initial 9 month period is over your rate is bumped to 2.83% and your payment will increase to around $926.80 per month (now this is a 4 year program and at the time of this writing the 4 year rate with a mono lender is 2.49%). So over the course of 48 months you will pay around $19900 in interest and your balance will be around $176200. Now using 2.49% rate over 48 months your payment is $894.94 per month. At the end of 48 months you will have paid around $18700 in interest and your balance will be around $175700. So as you can see that initial rate has cost you over $1200 more in interest.
Bottom line is you need to do your homework. As a mortgage broker I work for you and not the lender. Every deal is different and what is good for one client will not be a good fit for another. There is a time and place for bank products just as there are for a mono line lender. You may not qualify for one lender/bank and that’s why you need options. In today’s changing landscape it is more important than ever to have options and that is what I am here for.
Get the facts, know your options today and not before it’s too late. Yes the majority of mortgages can be moved or you can look at a blend and increase but why put yourself into a situation with limited options. A small difference in rate today could be a potential large savings in the future. Having said this I normally have the best rate and product anyway and if you come to me with an offer you have on the table and I cannot beat/match it then I will be the first to tell you that you have a great deal and take it. You have nothing to lose but so much to gain. Let’s put the odds in your favor instead of the house.
As stated the rates, terms used are all based on current offers as of today May 25, 2015 – rates subject to change without notice.
Eric Gall is the owner of Avanti Mortgages (operating as a mortgage specialist for TMG – The Mortgage Group Atlantic). If you are purchasing, refinancing or renewing your mortgage contact Eric or check out his website and apply online.