New Mortgage Product Comparison

2017-05-02 | 06:55:31

Recently we had a lender add a new product to the mix.  As a Mortgage Agent I always welcome innovative products, which give clients more options when they are looking for mortgage financing.  

That said, sometimes a new product isn't what it appears on the surface.  So let's investigate this new product and see how it compares to other some other products on the market.

 

The Product

 

This new product is based on how much down payment you have (You must have slightly more than 20% down, if you have less than 20% of your purchase price for a down payment this blog post is useless to you, turn back now by clicking here). You must qualify at the Mortgage Qualifying Rate using a 25 year amortization, the property must be owner occupied and meet the lenders guidelines.  Today the Mortgage Qualifying Rate is 4.64%.  Maximum purchase price is $999,999.00.

Disclaimer: Depending on your purchase price, the following comparison may work out differently and your rate is determined by how much down payment you have, along with your ability to debt service the mortgage over 25 years at the Mortgage Qualifying Rate of 4.64%.  However; for our purposes we are going to compare this product, to other mortgage rates and conditions based on a purchase price of $500,000 and having a down payment of $104,000.

 

The Comparison

 

With a down payment of $104,000, this lender will give you a rate of 2.29% on a 5 year fixed, if you meet the guidelines.  Along with this great rate, the lender charges a fee, of 1% of the total mortgage amount and they add that fee to the mortgage.  Using our $500,000 purchase price your mortgage would look like this:

(A) $500,000 - $104,000 (Down Payment) + $4,000 Fee = $400,000 Mortgage Amount with a monthly payment of $1,750.30

Off the top, I am sure most people are wondering, why on earth would you pay a fee to get a lower rate?  Good question, so what if you didn't pay the fee? A good 5 year fixed rate available with regular terms and conditions and NO FEE is 2.74% and it would look like this:

(B) $500,000 - $104,000 = $396,000 Mortgage Amount  with a monthly payment of $1,821.62

So there it is right?  The payment is far less with the lower rate.  That has to be the answer right?  That depends on how you look at it, most lenders know that a borrower is likely to set their payment and FORGET ABOUT IT.  The key is where you land at the end of your term, when you can switch lenders.  If you don't change your payments, or make extra payments, this is where you land using (A) and (B) above, 5 years later:

 (A) - Owing $337,109.24

 (B) - Owing $336,772.20

Looking at that, you may think (B) is the better bet with the higher rate, and it is, if you're the set it and forget it type of borrower.  However; what if you take the payment from (B) and apply it to (A)?  How does that look after 5 years?

 (A) With (B) payment - Owing $332,581.25

Voila, that has to be the big winner, at least when comparing 5 year fixed rates.  Keeping in mind, most borrowers break their mortgage after 3.8 years (on average), there is a greater than 50% chance you'll end up breaking your mortgage and paying a penalty, which could offset any savings gained.  So, what about variable rates?  Let's throw in a third option, using a currently available variable (say that ten times fast) of 2.25%, with no fee, using the same scenario above, and it looks like this:

 (C) $500,000 - $104,000 = $396,000 Mortgage Amount with a monthly payment of $1,725.02

The monthly payment is lower than both (A) & (B) above, however; it could change as rates move up or down.  Assuming rates don't change and they magically remain the same for 5 years, how much would you owe after 5 years?

 (C) Owing $333,463.71

If you are the set it and forget it type (and rates stay the same)  this is by far a better option.  You're ahead of the game in both payments and amount owing in 5 years.  You also enjoy the benefit of having a guaranteed penalty of 3 months interest should you break your mortgage and you can convert into a fixed rate, should rates begin to rise (without penalty).  So, what about those who aren't the set it and forget it type?  Let's use that $1,821.62 payment and again assume rates stay the same (which is unlikely):

 (C) with (B) Payment - Owing $327,336.75

To me, that looks like the winner there when comparing various options at a $500,000 purchase price and a $104,000 down payment.  Even if the rate adjusts slightly over the 5 years, you'll likely end up ahead and keep in mind that with a variable rate, the rate could go down. 

 

The Most Important Factor: You

Keep in mind, YOUR options are what you are comfortable with.  You may be the fixed rate type, who wants the lowest payment possible. Or you may be okay with changing rates with the ability to save down the line.  Your mortgage is your choice.  With that, make an informed choice and come see me about your best options.

 

John Greenlee, Accredited Mortgage Professional

Mortgage Agent, Lic #M10000667

 

**Rates listed are subject to change without notice**

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