It is a very wise idea to shop around for the best mortgage rates, after all it can save you thousands over the term of your mortgage.
Recently a personal friend called about the renewal notice he received from his current lender. They actually offered him 5.29% for a 5 year term; insane. We renewed him at 2.99% with friendly terms. His mortgage was for 200k which worked out to a savings of $15,058 over 5 years. Even a 0.1% difference could save $616.80 over 5 years, better in your pocket than the banks.
Having said that it is equally important to pay close attention to the terms and to make sure you fully understand what you are signing. There are many terms to look at, below are a couple of the majors.
The two major pitfalls you should be looking for are:
1. How is the penalty calculated if you decide to break your mortgage?
The majority of 5 year term mortgages are broke before the renewal date arrives. Knowing this you always want to have an out, even if you do not plan on selling. Occasionally unforeseen circumstances may arise and you do not want to be at the mercy of a bank. They show no mercy.
You want to ask your mortgage officer or broker for an example if you broke your mortgage in 2 years what your penalty will be and how it is calculated. A lot of these discounted rates base the calculation on the current posted rate. Imagine you signed up for the 2.99% and in 2 years decide you need to sell the home or refinance for whatever reason. Your penalty could be calculated on 5.29 (current posted rate) - 2.99 (current discounted rate) = 2.30%. So you will pay a penalty of 2.3% on your remaining mortgage balance for 36 months. If for example you have a 200k mortgage, your penalty could potentially be $13,800. Pretty damn scary.
There is no set way that any lender must base their penalty calculations. To protect yourself always ask what the comparison rate will be in case you do have to break your mortgage. Generally what you are looking for is a comparison rate that is fair and based on current discounted rates. For example if you decide to break your 5 year 2.99% in two years your want to see your lender comparison rate be the current 5 year discounted rate or the 3 year discounted rate. With interest rates as low as they are now, most likely you will end up with just a 3 month interest penalty. If the comparison rate is the posted rate, run and run very fast, this is not a good deal.
2. Is your mortgage going to be registered as a collateral mortgage?
Please click on the link for a little more detail on what a collateral mortgage is. In a nut shell, they are bad bad bad. The only people who should be obtaining a collateral mortgage are people in a strong financial position.
Quick scenario ~ Let's say you have a 200k mortgage and a bank signs you up with a collateral mortgage. Then they offer you a line of credit to go with it, you also get a car loan and a Visa down the road. Now your renewal date has arrived so you decide to shop around because you were offered a lousy rate, say 5.29%. A broker offers you 2.99%, great lets get started. At some point it is discovered you have a collateral mortgage and didn't even know it. Well a collateral mortgage is not transferable, it must be handled as a refinance (lawyer fees). Also we now find out your line of credit, car loan and Visa are all charged against your home. The only way to handle your file is if you pay off all your other debts against the home first or throw all the debts into the new mortgage. Problem!!! There is not enough equity to refinance everything and you don't have enough available cash to pay out all the other debts. Guess what??? Yep you guessed it, you are going back to your original lender and accepting the lousy rate. You have been euchred, not a good feeling.
Remember, terms are just as important as rate.
I really hope this posts will help out a lot of people, I am a little dramatic in this one but it is so crucial that you are getting your mortgage from someone that is trustworthy, as well knowledgeable in the industry. And wants to see repeat business and referrals from your friends and family in the future. Use a good and reputable mortgage broker.
Please reply or discuss, ask some questions.
Till next time, have a great day!
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