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Often
times, borrowers are fixated on their mortgage rate because it's the one aspect
of their home financing they know to ask about. But, it's important to look
beyond mere rates into the bigger picture surrounding what's significant when
it comes to your specific mortgage needs.
If
we compare the difference between 2.99% and 3.04%, for instance, 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.
While
"no-frills" mortgage products typically offer a lower - or more
discounted - interest rate (like the 2.99% used in the example above), when
compared with many other available products, the lower rate is really their
only perk.
The
biggest problem with looking at rate alone is that you may end up paying
thousands of dollars in early payout penalties if you opt for a five-year
fixed-rate mortgage, for instance, and then decide to move before the five
years is up.
No-frills
mortgage products won't let you take your mortgage with you if you purchase
another property before your mortgage term is up - i.e. portability is not an
option with this product.
Portability is an important option that could save
you money over the long term if the home of your dreams 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.
This
type of product is only plausible for those who have minimal plans to take
advantage of benefits that will help pay off your mortgage faster - such as
prepayment privileges including lump-sum payments.
Essentially,
this product is only ideal for: first-time home buyers who want fixed payments
and have limited opportunities to make lump-sum payments during the first five
years of their mortgage; and property investors who need a low fixed rate and
aren't concerned with making lump-sum payments.
It's
understandable why these products may seem appealing. After all, not everyone
feels they have the extra cash to put down a huge lump-sum payment. And who
needs a portable mortgage if you're not planning on moving any time soon? It's important to remember that 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 something.
Many
people won't sign a cell phone contract for longer than three years that they
can't get out of, so why would they then sign a mortgage for five years that
they can't get out of?
The
thing is, you can still obtain great mortgage savings without giving up the
perks of traditional mortgages. For starters, many lenders are willing to offer
significant discounts if you opt for a 30-day "quick close".
And
there are many other ways to earn your own discounts. For instance, by
switching to weekly or bi-weekly mortgage payments, or by obtaining a
variable-rate mortgage but increasing your payments to match those of the going
five-year fixed rate, you'll be ahead of the typical discount of a no-frills
product before you know it - and you won't have to give up on options.
Banks
don't give anything away for free - they're there to make money. That's why
it's essential to discuss the full details surrounding the small print behind
the low rates. It's also important to take into account your longer-term goals
and ensure your mortgage meets your unique needs now and into the future.
As
always, if you have questions about mortgage rates, or other mortgage-related
questions, I'm here to help!
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