Remember when that was the go-to phrase to end the one-upmanship on the playground? The little sentence thrown in the face of your opponent as a last ditch effort to win the fight? And the general comeback? “Oh YEAH?? Well, mnaw” (or some equally lame variation).
Well that’s what’s going on with the mortgage rate “wars” that are happening right now. It’s all talk and not a lot of follow through. Don’t get me wrong. I’m loving the low rates and its great for clients that the lenders keep trying to out-do each other but rates are not the be all and end all to a mortgage.
Often times, borrowers are fixated on their mortgage rate because it’s the one aspect of their home financing they know to ask about; it’s concrete and what is most predominantly advertised. But it’s important to look beyond just the rates to the bigger picture surrounding what’s significant when it comes to your specific mortgage needs.
For example, if we put into real terms the difference between 2.99% and 3.04%, it works out to an additional $2.66 in your monthly payment per $100,000 of your mortgage. Over the course of a five-year term, this culminates into just $159.60 per $100,000. Say what??!
So, while “no-frills” mortgage products typically offer a lower interest rate (like our 2.99% example) when compared with many other available products, the lower rate is really its only perk. A one trick pony so to speak.
The biggest problem with looking at rate alone is that you may end up paying thousands of dollars in early payout penalties if, for instance, you opt for a five-year fixed-rate mortgage and then decide to move before the five years is up. Yes, you read that right. So you get that great job promotion and now you need to move so you have to break your “no-frills” mortgage because you can’t transfer it to your new home and you get dinged up the wahzoo to do it. But don’t worry, you’ve invested that $159.60 you saved in some magical investment vehicle that pays you a 200% return so you’ll at least be close to breaking even. No? Oh…you spent it on shoes? Well, that’s unfortunate.
No-frills mortgage products won’t let you take your mortgage with you if you purchase another property before your mortgage term is up – portability is not an option with this product. Portability is an important option that could save you money over the long term. For example, if that dream home is within your reach before your mortgage term is up and rates have risen (which they have a tendency to do over a five-year period) you get the house AND keep your existing low rate. Cha-CHING!
This no-frills, rock-bottom, fire-sale type of product is usually a good option for those who also have zero plans to take advantage of prepayment privileges that will help pay down their mortgage faster – such as lump-sum payments, double or increased payment frequency, or general extra payments for those times when you won a fistful of cash at bingo.
Essentially, this product is only ideal for borrowers who a) are certain then will not be moving before the end of their term; b) won’t be in a position to put any extra money on the mortgage or c) property investors who need a low fixed rate and aren’t concerned with making lump-sum payments. Oh, and d) those borrowers interested in saving the above-noted $159.60/year over anything else.
It’s understandable why these products are appealing. I don’t fault you. I will hunt out a deal like no other. I have bins of clothes for my 8 month old ranging in sizes from now ‘til college because I can’t pass up a bargain. But it’s important to remember that, like fashion trends, a lot can change over the course of five years – or whatever term you choose for your mortgage. You could get transferred, find a bigger house, have babies, change careers, etc. Five years is a long time to be anchored to anything. At least with an out-of-fashion outfit it can be re-purposed as a Halloween costume. Your mortgage, not so much.
The thing is, you can still get great mortgage savings without giving up the perks of traditional mortgages. And there are still many other ways to earn your discounts. A mortgage shouldn’t be a clearance-item-impulse-buy-that’s-one-size-too-small-but-that-you-will-fit-into-eventually-once-you-lose-those-5 lbs-but-you-never-do-and-it-just-sits-in-your-closet…
Remember, you are borrowing money from someone who is in the business of making money off of this transaction. If they are not making it on the rate they are sure as heck going to make it somewhere else, or at the very least prevent you from taking your good rate and running. They’ll get their pound of flesh out of you somehow. That’s why it’s essential to discuss with your mortgage broker the full details surrounding the small print behind the low rates.