Everyone loves a low rate mortgage. The less the rate the less you’re paying the lenders, The less you pay the lenders the more that goes into your pocket. You do have to remember that not all mortgages are created equal. Some deep discounted mortgages have restrictions on your pre-payment or pay out abilities. Some mortgages can have big payout penalties should you pay the mortgage out early and some mortgage companies will register your mortgage different on your title. Lets look at these differences.
Chances are if you are seeing a rate much lower than others are offering you are seeing a No Frills mortgage rate. What this does is offer you a low rate in exchange for advantages for your mortgage. Most lenders will offer you the opportunity to pre pay your mortgage by up to 20% of your original mortgage amount or increase your mortgage payment by 20%. With the No Frills mortgage you are cutting that down quite a bit or even eliminating that ability all together in some cases. Some of these will not even let you switch to a rapid Bi weekly payment so you can pay your mortgage down faster. These can also be non portable which really ties you to the mortgage and to the home. They want you to have the mortgage with them for the full amortization of the mortgage so you can keep paying them interest.
Payout penalties are a big thing in a mortgage. Not very many people buy a home with the plan to move within the first 5 years of the mortgage however mortgage stats show that this is happening. Majority of first time home buyers are moving within the first 5 years of their home purchase. Some lenders, including the major banks, are calculating payout penalties using posted interest rates. This can cause your payout penalty to sky rocket should you need to pay the mortgage out. Your penalty can be based on what they call the Interest Rate Differential (IRD). Your lender offers you a discounted rate off of posted to get your mortgage. When you want or need to payout your mortgage the penalty is based on where the rates are at closest to the term that you have remaining. So watch for those lenders that will base your penalty on the full posted rates not the discounted rates that you received. The posted rates will cause a much larger differential in the rates versus using a discounted rate and will really increase your penalty.
Collateral mortgages are becoming a big thing with some lenders now as well. This is a strategy that the lenders use to make sure you stay with the lender as they are not able to easily switch to a new lender. You may look at this as a no big deal thing but let me tell you how this can be a big deal. When a lender registers your mortgage as a collateral mortgage they register the mortgage for the value of the home or sometimes over value of your home on the title. When your mortgage comes up for renewal there are not many lenders that will switch a mortgage over if it is registered as a collateral mortgage. So at renewal the lender can offer you whatever rate they want and you would either have to take the mortgage or repay legal fees to switch it over to a new lender. They will try and sell you on the collateral mortgage by saying that the registration at or above value will come in handy when you want to refinance the mortgage down the road. This is just their tactic to lock you into their mortgage. There are no fee refinance options that are available should you need to refinance down the road.
These are just some of the things to watch over for in a mortgage. Even though that rate is attractive and/or if your major bank is matching the low rates that a mortgage broker is offering, keep in mind the mortgage that they are offering you may not be what you want down the road. To save $5 a month can come back to hurt in the end.
Don’t just get a mortgage, Know your Mortgage.
Thanks for reading
Scott Bourke, AMP
DLC Regional Mortgage Group
Follow me on twitter at https://twitter.com/reddeermortgage