We all want the best. For instance, a Ferrari is way better than a minivan. It’s faster, sleeker and much more prestigious. But what if you have three children and drive to hockey every Saturday and need the extra space? All of a sudden that minivan is looking much more appealing. And when you factor in the higher costs associated with maintaining every single aspect of that Ferrari? That minivan is downright shiny.
This theory applies to your mortgage too. I’ll admit there is something reassuring about a brick and mortar building which you can visit up to seven days a week and be greeted by a friendly clerk who helps you do whatever it is you need to do. But consider for a moment if the value you placed on that building were misguided. That the prestige many of us place on being with a major bank for our mortgage is not quite what we thought. What if in making the choice to deal with your bank you doomed yourself to higher costs and hidden clauses? All of a sudden your Ferrari of a bank seems less appealing.
Let’s look at a few of the unexpected costs you can be hit with.
1. Payout penalties- there is no standard on how lenders charge this penalty if you break the mortgage. Your mortgage is a contract and you will have to pay a fee to get out early. I have seen these range from $3,500 to $18,000 on the same exact mortgage with the only difference, the lending institution. Life happens and you may end up needing out early due to a marital break down, a job loss or other life event. I would also caution that some of the crazy low mortgage rates out there come with an additional penalty. You could be charged 2.75% of the principle PLUS the regular penalty.
2. Prepayment privileges- Did you know that some lenders do not apply your extra payments right away? It’s very true. They hold the funds in a separate account where they generate and keep the interest gains while you miss out on the full benefit you are striving for.
3. Interest compounding periods- Did you also know that some lenders compound interest on a Home Equity Line of Credit monthly? Einstein identified compound interest as the 8th wonder of the world and stated that those who know how to use it properly will benefit greatly. This monthly calculation difference over that of a semi-annual will cost you more in the long run.
4. Collateral mortgages. – A collateral mortgage is where the lender registers on the title that you owe them more than you actually do. The benefit is that you can borrow additional funds down the road if you so choose without having to visit a lawyer as there is no change to the title of the property. The downside is that these mortgages are much harder to switch out a new lender at renewal which could leave you with a higher than market best rate. Your other borrowing such as for a vehicle or credit cards can now be tied to your mortgage through the nasty fine print. Depending on the lender you may be required to pay out all of the borrowing associated with the mortgage if you sell. This can leave you in a poor position when you go to buy again with less than you thought as a down payment.
5. Porting Policies. – Some of the banks have strange policies. For example, one has a policy where you keep the current mortgage as is and any new funds are taken in a new term at a new rate with a new renewal. That leaves you never able to move your mortgage to a new lender without incurring some penalty. You are stuck potentially not being able to get the best rates which costs you greatly.
All I’m saying is this. Ask questions before you sign. Lots of questions. Know if you are opting for a Ferrari when what you really need is the flexibility, extra leg room and lower costs of the minivan. Have a great week.
Pam Pikkert is a mortgage broker with Mortgage Alliance – Regional Mortgage Group in Red Deer.