Once again I find myself writing about "apparent deals" at well known lending institutions.
This time, a national lender is spending a small fortune is advertizing on TV, on billboards, on radio, etc. offering to pay for your legal fees and closing costs as part of their mortgage package. Most Consumers realize that closing costs (legal fees, land transfer tax, legal disbursements, appraisal fees) cost literally thousands of dollars, so the gimmick is very inviting. As mentioned previously is this medium, mortgage market share is very important to all lenders, so the competition is testing methods to attract the unsuspecting client. When I first read the ads, I suspected right away that this ploy was just a "bait & switch" type of advertizing, but for the purposes of reporting the facts to you, I decided to investigate the deal. The mortgage officer took me into her office, closed the door, and asked me why I had come without an appointment. I told her the ad in front of the premises did not indicate I needed an appointment. She laughed and started to fill out a mortgage application. I pretended to be an ordinary Consumer and went along with the invasive questions. Once completed, she asked me to sign the application so she could get a credit report going. I told her at that point that I would not sign anything until she explained the "deal" to me. This is the scoop......if and when you take a mortgage from this Lender, at the posted rate, then the Lender will rebate you the Consumer, the costs of all legal fees, land transfer tax, etc, on closing, up to a maximum of 4% of the mortgage amount. Should you payoff the mortgage prior to the expiry of the five year term, you must pay back the proportionate amount, on top of the normal penalty. So if you sold your house in three years, not only would you have a three month interest penalty to payoff the mortgage, but you would also have to pay back roughly $1600, being the pro-rated closing costs. The posted rate is traditionally one percent higher that the discounted rate. On the surface, this program seems very exciting, but an analysis of the "deal" will show something much more somber. Let us take an example of financing a $150,000 home with 5% down, or $142500. Had you taken the posted rate, your payments would be $1065 per month for Principal + Interest, amortized over 25 years (7.30%). Had you qualified for discounted rates, the five year term could have been as low as 6.15%. The discount of (posted rate versus discounted rate) 1.15% per year for 5 years would amount to savings of 5.75% of the mortgage amount, compared to the maximum 4% the lender offered you up front. That difference is an additional $2500 in interest savings, plus the fact that if you paid off your mortgage in three years, there would be no additional mortgage penalty. Better still, if you could afford the $1065 payment at the posted rate, then you should be able to afford the same payment ($1065) at the discounted rate which means your amortization would be reduced to 20 years instead of 25 years. This would save you 5 years worth of payments at $1065 or $63900 overall. Taking the lender's deal could deprive you of over $60000 over the life of your mortgage. I am suggesting that gimmicks favour the lending institution. The smart shopper should take the lesser rate rather than the gimmick.