This is likely a great time to debate this subject as more and more lenders and brokers are competing for the borrowers business. Everyone is offering some amazing rates on fixed 5 year mortgages, however some lenders are trying to offer slightly better deals, but are they really better? for example Is it more important to take a mortgage with full, or better pre-payment options and pay a slightly higher rate or just take the lower rate and be more restricted in your pre-payments?
This question in best answered with the borrowers own thoughts of whats important to them in a mortgage. for example in my opinion the “BEST” mortgage is one that is paid off!
Considering this, pre-payment options are very important in helping doing this. Let’s say that you can get a .10% lower rate (3.69%) with one lender but you are then limited to only paying down 10% of your original mortgage balance ONCE per year. Another lender is offering a slightly higher rate (3.79%) but you have the option of paying down 20% of the original mortgage balance, as many times as you wish, as long as the payments are a minimum of $100.00 and are on a payment date. That extra 10%, if the clients have it and the ability to pay down the mortgage in multiple payment would easily make up for the .10% difference in the rate.
Let’s consider another option, let’s say the lower rate lender only allows a 10% increase in payment and the higher rate lender offers a 25% increase in payments. If the clients took a longer amortization to allow them a little more flexibility and comfort level but later down the road realized that they wanted to increase their payments to reflect a shorter amortization, more towards the 25 year mark…. The lower interest lender while only allowing a 10% increase in payments would only reflect a 6 year reduction in amortization, thus allowing an original amortization of 35 years to decrease to 29 years.
The higher rate lender, offering 25% increase in payment options allows the original amortization to be reduced from 35 years to just over 23 years. This is close to 12 years of interest savings, 6 more years than the lower rate lender. How quickly do you think you could make up for the .10% difference in the rate over 5 years?????
Simple interest calculations show that on a 200K mortgage with a .10% difference is equal to $200 a year, and $1000.00 over 5 years. However, I believe that having the ability to pay down your mortgage faster, and the ability to save years and years of interest by increasing your payment is more important..
Remember when taking out your next mortgage to think about more than just the rate.
Your thoughts are appreciated and I look forward to hearing from you.