With the real estate market being much hotter than the weather these days, you might have noticed that interest rates on mortgages are at an all-time low as well – Making it a fabulous opportunity for first-time home buyers and real estate investors alike. When you compare today’s interest rates to the rates of 5 years ago, though – It might make you ask the question… Are those rock bottom rates, too good to be true? Not necessarily, but you’ll want to take a deep look into the fine print that accompanies that extremely low-interest-rate before you sign on the dotted line. To help you out, here are 4 questions to ask when considering a “No-Frills” mortgage which might actually have the lender’s best interest in mind instead of your own.
What are the penalties?
When it comes to mortgages and renewal terms, the average 5-year borrower changes their mortgage every 3.5 years – breaking their mortgage about 1.5 years before their mortgage is set to renew. There’s various reasons as to why this might happen – for example you might be asked to relocate for work, you might lose your job and have to downsize or you might fall in love and want to move to California – point being, you never know what life has in the cards for you, that might make you want to break your mortgage early, but when you do, you want to make sure you’re not stuck paying a hefty penalty to do so. With “No-Frills” mortgages, you are likely to find higher than average penalty fees for breaking your mortgage early. Reason being is that the lender won’t make as much money in interest payments with your low-interest rate if you don’t keep the loan for the entire term. To counterbalance their loss in interest when you break the mortgage early, they make their penalty fees higher to maintain their profitability.
Are you being baited by the lender?
It’s a well-known fact that the lower your prices are, the more interest you will garner, but often you will see just under the mentioned rate, an asterisk with a note stating “some restrictions may apply”. Then when you make the call to inquire, you find that because of excuse XYZ you aren’t actually eligible for that rate, but you are eligible for a “GREAT” rate about 2% higher… These types of conversations might leave you feeling like you’re talking to an old school salesman instead of an industry expert who can help you find a mortgage with the best rate, and best options for you specifically. Don’t feel obligated to go with that other “GREAT” rate just because you called or you could be captured with a tactic well known as a bait and switch. You’re shown one thing to get you through the door and are sold something completely different by the time you leave.
Are you limited to the amount you can pre-pay in a lump sum?
As we go through the ups and downs of life we might collect a little extra money from clipping coupons or gifted monies that would be well spent on taking care of a chunk of the mortgage. But, what if you were told that you are not allowed to pay down your mortgage with that money when you want to? You might find with your “No-Frills” mortgage that a clause in that mortgage states a very minimal pre-payment option as low as 0-5% (instead of the usual 10%-20%) as well being limited by the number of pre-payments you can make per year. This means that in the span of a year the maximum amount you can pre-pay with a lump sum of cash is $0 at worst or much smaller than you had hoped at best. With extremely low-interest rates being offered by the lender, they only make their money off of your mortgage, if you carry the principle right to the end. If you were allowed to pay a larger lump sum each year than what they’ve outlined, you could pay off your mortgage faster, leaving the lender short on profit in the end game.
Are you limited by top-up options?
On the flip side of the coin, your “No-Frills” mortgage might also limit your top-up options. If you were to ever get into a bit of debt and wanted to consolidate that debt using the equity in your home, you might only be able to access as little as 5% or less of that equity to help you out. Whereas with your average mortgage you can typically have access to 20-25% of that equity to consolidate your debt if the need were to arise.
When choosing the right mortgage for your needs, make sure you weigh all of the pro’s and con’s in the big picture before jumping on the lowest rate. As you can see outlined above, there is more to the equation than one simple interest rate. If you play your cards right, even though your interest rate might be a percent or two higher than available “No-Frills” rates – you might be ahead of the game in the long run from having the option to make pre-payments as your cash flow increases or you could have the benefit of an extremely low penalty fee if you decide to break your mortgage before it’s 5 year renewal date. Having to pay out a $5,000 penalty after 3.5 years instead of having paid an extra $1,500 in interest over the last 3.5 years, can affect your cash flow and savings a little more than you had originally thought. The lesson to be had here is; Investing with a higher interest rate short term can have plenty of long-term benefits to make it worthwhile.