Occasionally you will see mortgage rates that seem too good to be true and sometimes they are but how do the lenders make these rates look so good. Here’s a list of things you should watch for when mortgage shopping that can make a mortgage rate seem lower:
- Mortgage rates can be made to appear lower by simply having a reduced amount that you can pay in lump sums. Majority of lenders use a standard 20% prepayment and 20% lump sum as their standard features. In many cases they will reduce these amount so that you can’t pay down the mortgage faster and therefore you end up paying more interest.
- Sometimes you will see a great mortgage rate but it has to be CMHC insured so that a premium is in place at the request of the investor. They are willing to take a little less interest if they know that default insurance is in place.
- In many cases the home must be owner occupied as most lenders will want a higher interest rate if the home is to be used as a rental.
- Quick closing dates are another way that lenders will have reason to reduce the interest rate. Usually this happens when an investor puts forward a large sum of money and they want it out into the market to keep it from sitting not collecting interest. You will find these funds available on 30 to 45 day windows of opportunity.
- Purchase only is also used to reduce rates, so refinance or renewing clients may have to pay the higher interest rate.
- Pay out penalty is also another way for lenders to reduce the interest rate, in some cases interest rate are the lowest in the industry but they have higher pay out penalties and the client is with that lender for the entire 5 years of the term. Standard payout penalties allow for 3 months interest or IRD calculations in one case we have a super low rate but the penalty is 3% right up until closing.
So as you can see it is buyer beware and make sure you understand your mortgage features, can you pay down and can you get out early with reasonable penalty. All of the little extras will add up over the term of your mortgage and you want to be sure the features meet your needs.
