Beware Ads for Mortgage Rate SpecialsPosted: November 20, 2013
For those of you following us, you may have noticed we took a bit of a sabbatical in regards to our blog. Busy markets with lots of changes had us distracted but now we’re back with a goal to keep our followers updated with news updates and commentary on subjects which may affect real estate markets and our financial well-being. Welcome back!
Based on current interest rate trends and continued threats from our Federal Finance Minister to further curb mortgage lending guidelines, we thought it prudent to re-post an article we wrote regarding mortgage penalties back in 2012. We made a couple of tweaks to update current mortgage trends, but basically the same rules apply. As always, your comments are appreciated!
You may have heard of mortgage lenders having “specials” for 5 year fixed mortgages. It is important to have a broker on your side to walk you through the options and let you know what are really good deals and what deals just look good on the surface. These “specials” can be a minefield of hidden dangers.
The 2.99% “special” has some interesting terms and conditions:
- Full repayment before maturity can only occur if property is sold to an unrelated purchaser at fair market value or if the mortgage is renewed or refinanced into another mortgage product at the same lender.
- max 25 year amortization
- 10/10 repayments
- pre-payment penalties apply
Well, the 25 year amortization and the 10/10 pre-payments aren’t as good as the 3.29% lender but it is repayment and pre-payment conditions that really matter.
Unexpected things happen and you may need to refinance the mortgage at some point in the next 5 years. With the “special” you don’t have any options as you are contractually obligated to stay with this lender. So, if you do need to refinance then you will have to take whatever rate they offer you. This will most likely be a posted interest rate (at this lender the posted 5 year is 5.29% today). You can’t leave or shop around so you would have to take whatever they give you or sell your home.
And that isn’t the worst part. Even if you are willing to risk the rate on a refinance you would still need to pay a penalty to break that mortgage and take a new one. This is the big problem. All 5 year fixed mortgages have a penalty of the greater of 3 months interest or IRD. IRD stands for interest rate differential. Each lender has different rules on how they calculate their IRD and this can be the biggest hidden danger in the mortgage industry.
Say you want to pay out your mortgage after two years of a five-year term. Let’s compare penalties on the 2.99% “special” and the 3.29% 5 year mortgages above:
Penalty on 2.99% $10,373.03
Penalty on 3.29% $2,518.79
This is based on a $300,000 mortgage and a 30 year amortization. Almost an $8,000 difference and that’s if you’re even able to pay out the “special”! If rates were lower these penalties would be even higher.
With rates steady but government threatening to tighten mortgage lending guidelines, we believe everyone should now be reviewing their existing mortgage. It may very well save you tens of thousands of dollars over the long-term to consider your options. To do so properly means you need independent advice. Check out the new 10 year rate at 4.29%!
Let us know if we can be of service reviewing your mortgage. We welcome your calls and emails. As always, we’re here to help!