Choosing an “on sale” fixed rate at a bank that collects high mortgage penalties
According to unofficial statistics 6 to 7 out of 10 mortgage owners will payout the mortgage early and will pay mortgage penalties. At the point of taking the mortgage, all these people will confidently declare they will never payout the mortgage earlier and pay mortgage penalty. Still the statistics is different.
Most banks will aggressively promote the fixed rate, that includes a much higher mortgage penalty than variable rate or even a fixed rate that is not coming from a bank. The difference for a $400,000 mortgage could be between a reasonable mortgage penalty of $3,000 to a high penalty of $25,000 with the bank. Obviously the higher mortgage penalty will prevent the buyers from different financial moves like selling and buying a house. A very high penalty will also prevent renewed funding for additional financial goals like securing university tuition for their kids.
Mortgage penalties are the primary income source of the banks. The focus on the interest rate is meant to divert the attention from the most significant parameter that makes the mortgage expensive which is the early prepayment penalty. Clarifying the type and size of your mortgage penalty should be the first thing your mortgage broker or bank inquire for you, in order to get you the best mortgage.
Choosing a mortgage with a kickback
There is nothing worse than the “Kick-back” trap. The bank gives its clients a “gift” of $2,000 if they take a mortgage with an excellent rate. It’s just later, when the borrower wants to pay off his mortgage early which happens in 60-70% of the time, they discover they are required to repay that “gift” with interest. The bonus stops being a bonus, and in addition, in most cases that benefit is accompanied with a fixed interest rate and high mortgage penalty.
Go for a 5 year mortgage because that is what everyone does
Most clients choose a 5 year term, although banks offer 3 or 4 year terms with lower interests. The banks are also familiar with the statistics in which mortgage holders pay off their mortgages after no longer than 3.7 years, therefore they promote the 5 year term as if they secure the client. In fact, in 70% of these cases, these mortgages end up with an early payment penalty and profit to the bank
With most lenders, five year term mortgage rate is more expensive than rates for alternative terms. On top of that, during the term less equity is accumulated. For a $400,000 mortgage the rate deference may result in a lose of $3,000. It is highly recommended to check all mortgage terms and check which term saves you the most.
Not considering an insured mortgage even if it comes with a lower interest rate
Recently, the best interest rates are offered to insured mortgages or for borrowers that have less than 20% down payment.
Even if you have a down payment larger than 20% or large equity in the house in a case of refinancing and all you need is no more than 80% mortgage, it is advisable to check an insured mortgage option. Let you mortgage broker calculate for you the best choice. You can go for a regular mortgage with a good interest rate or an insured mortgage, that includes a insurance fee with a lower interest rate. Eventually the numbers will help you make your decision. Most important is to see which option gets you most savings at the end of the term.
Paying fees in order to receive lower interest rates
This issue is relevant mostly for business mortgages, construction mortgages or second and private mortgages. In these mortgage plans there is usually a 1-2% fee, sometimes more. In this case, a full mortgage cost calculation is required. Unsurprisingly a discounted rate mortgage that carries fees turns to be much more expensive than a mortgage with no fees and no discount on the rate. Once again this is a game of numbers. You have to calculate the full cost of mortgage and not get tempted by the lowest monthly payment.
The outstanding balance at the end of term will help you figure out which mortgage is best for you.
Looking at the mortgage as a means to fund a specific property and not as a tool for re-arranging your finances
When taking a mortgage or refinancing a property, it is the time to reevaluate your families financial planning and set financial targets. Mortgage is the cheapest and biggest loan you can take. Which is why you should include all your financial commitments like credit card debt. While you apply for a mortgage you can convert debts of 19.9% and more to 2-3.5%. At the same time it is recommended to think of long distance goals like funding wedding, new car, bar mitzvah or education. The access for available funds in low payments will allow your mortgage to help with your life events and fund them without becoming a burden for your everyday life. If you happen to get extra funds you can always payout a portion of your mortgage. A good mortgage broker will create a analysis of your needs and build you a mortgage plan that is best suited for you priorities and needs.
Not taking into consideration the predictions for the coming years
Most experts are predicting that the interest for mortgages will rise. Because of that prediction most borrowers ensure themselves for 5 years plans with a fixed interest. We direct our clients which could be approved, to take a mortgage with a variable interest rate, that had proven itself to be the cheapest, even when the prime goes up or fixed interest for short term. In addition the early payment fee for variable interest rate is the lowest in the market, and as mentioned before, 60-70% of customers will prepay the mortgage and pay that fine. When taking a mortgage you must consider the market that is expected at the end of your agreement. Economists found that the lowest interest rates are offered during election time in the US. It is recommended to check the election cycle and choose a plan period that will fit that cycle. For example there is no point in taking a 5 year plan if the upcoming elections will be in 4 years. You should consider the mortgage as an engagement for the next 20-25 years and build a plan that will react not only to the current plan but also long term.
In conclusion, your mortgage is much more than the means to finance a specific asset. Planning correctly will save you a lot of money. We invite you to think about your mortgage and plan your financial steps accordingly.