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January 27, 2012 - Glen’s Mortgage Perspective – Experience Counts!
Banks are Advertising Incredible Loss-Leader Rates
- Do those Rates Make Sense for You?
In a drive to aggressively increase their market share of mortgage business, some banks are offering limited-time-only, low-rate specials. Fair enough, it’s a competitive market out there. In fact, I’m grateful for the buzz created since it has raised some interesting discussion points.
The main point is:
Rate is not Everything. What attracts clients to rate specials is the perception that they could lower their interest costs or lower their payments. Be aware that perception is not reality. Let me run the numbers for you to find out if that rate will indeed lower your monthly costs.
Overall, these mortgage rate specials will work for very few borrowers.
In the past few weeks I have fielded many calls from my clients with regard to these special rate mortgages. I was happy to run comparative breakeven calculations to determine whether it made sense for them to break their existing mortgage contract, pay their penalty and refinance.
To do the calculation I needed the following information:
- current mortgage amount
- current and advertised interest rate
- current payment and frequency per month
- current amortization
- non-mortgage debt load (estimate monthly payments & balances)
Will a bank representative do that calculation for you and give you a meaningful comparison? Probably not. Unfortunately, some clients invested considerable time and effort into dealing with the bank branch or representative and had their credit history pulled unnecessarily.
Before contacting the bank, I advise people to contact me first.
Why? By phone, I can run the numbers on that “special-rate mortgage” for you. If you contact the bank and do not qualify for that mortgage special, the bank may block me from getting you a better deal from that same lender through the broker channel – and that limits your options!
If necessary and with your permission, I will protect your credit score and pull your credit history once – not once per lender - and use it to analyze many deals offered by multiple lenders.
Here’s some client experiences that occurred this month.
Comparative Analysis. When asked, one bank representative calculated the interest cost over the total lifetime (25 years) of the mortgage – not the actual contractual term of the mortgage that is 5 years. The mortgage rate at the end of the term is unknown; therefore, interest costs over the remaining balance of the mortgage (e.g., 20 years) are also unknown at present. Thus, calculating the total interest cost of the lifetime mortgage is irrelevant to the client deciding whether or not to accept the mortgage product offered – so why was that done?
Service. One of my clients made an appointment to see someone in branch. She took time off work, arrived on time, and then learned that 7 bank customers were booked when the representative only had time to see 5. When told she had to make a later appointment, she walked out.
Let me Research Restrictions and Explain How they May Effect You.
I reviewed the banks’ mortgage offerings and discovered that there are a number of restrictions on who can qualify for these rate specials. Here’s what I learned about the special rate mortgages.
1. Owner-occupied. Overwhelmingly, the properties have to be owner occupied to qualify for the special rate. Therefore, these low rate mortgages do not apply to rental properties.
2. Closed mortgages. These rate specials are largely for closed, fixed-rate, 5 year mortgages. If your life situation changes or you decide later that the mortgage product or the bank service does not suit you – it may be very costly to get out of that mortgage contract. Some banks will make you pay the total interest cost as if you went full term! To avoid that high interest cost, you will need to prove an arm’s length sale of your mortgaged property (e.g., no family member sales) or wait until the end of your mortgage term (e.g., 5 years) before you can refinance.
3. Only 25 Year Amortization Period. If you currently have a 30 or 40 year amortization period on your mortgage, then changing to a 25 year amortization period could increase your mortgage payments dramatically.
4. LOC. If a Line of Credit is important to you in order to:
a. consolidate consumer debt and lower interest costs,
b. access low rate credit for other purchases or investments, or
c. take advantage of tax-saving strategies
then, these special mortgages are probably not for you.
5. Limited PrePayment Privileges. Many of these special rate mortgages allow only a 10% (or less) prepayment privilege per year on the original amount borrowed. Your current mortgage may allow up to a 20% (or more) lump sum prepayment per year. Taking advantage of higher prepayment privileges can greatly reduce your amortization period and your interest costs over the term of your mortgage.
6. A-Credit Rating. Those with bruised credit do not qualify for these special rate mortgages.
In Closing...
A bank can only offer its own products. If the bank’s branch product is not a good fit, I will advise my client of other mortgage products that may be more suitable.
As I’ve been promoting for the past decade, let me “mortgage it right” for you. Save yourself the aggravation and please call me first if you have questions with regard to your current and future mortgage decisions.
A mortgage is a loan you obtain to pay for a home and any land it sits on. The home and land is used for collateral on the loan, which means that if you don't make your payments, the lender can take the home away to cover your missed payments.
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