Determining the price of your mortgage
Every week CREB Now collects mortgage rates from various sources and publishes them in a convenient chart to the right of this column. One would think that this would make the mortgage shopping process easy, all you have to do is scroll through the list and find the company with the lowest rate. After all, pretty much every mortgage is the same right?
It’s not quite that easy. Not all mortgages are created equal, and behind each of those rates is a set of terms and conditions that affect the price of the mortgage, quite often more than the interest rate itself.
To put it into perspective, every other good or service that you buy is priced in dollars and cents. A mortgage on the other hand is priced in per cent, which is the factor by which the dollars and cents are calculated. If you compare a 25 year and a 30 year mortgage however, even if they are both at an interest rate of 2.89%, the 30 year mortgage costs more money. The interest rate is part of a bigger picture that along with terms and conditions will determine the price.
Terms and conditions include things like how payout penalties are calculated, the pre-payment privileges, and when and how you can pay off your mortgage.
Payout penalties are by far the most important item to consider. Often buried in the fine print, the method of calculating a payout penalty can be the difference between it costing a few thousand dollars or tens of thousands of dollars to break a mortgage. Monoline lenders, who typically deal only with mortgage brokers, often have more favorable payout penalties than their bank counterparts. Coincidentally, they are often funded by the big banks and have highly competitive rates.
Pre-payment privileges also play an important role in determining the cost of your mortgage. The lower the pre-payment privileges, the greater the obligation you have to pay more in interest. Lower pre-payment privileges can also mean a higher payout penalty.
Other minor subtleties can also end up costing you more money. If you get stuck with a bona fide sale clause, you won’t be able to payout your mortgage in its entirety unless you sell the house. In other words you won’t be able to refinance to another lender for a better deal, which could prevent you from saving money elsewhere.
With so many different terms and conditions out there, you can’t simply use rate as the sole factor when choosing your mortgage. The only way to really see all of your options is to talk to a licensed professional. Better yet, an Accredited Mortgage Professional (AMP). You can find one at Mortgage360.
Nolan Matthias holds a Bachelor of Arts Degree in Economics, is the co-founder of Mortgage360, and the author of The Mortgaged Millionaire.
