Phil and Sue recently received a renewal offer from their bank. They currently have a variable rate mortgage and they noticed that the higher fixed rate offer at 2.64% had a lower payment ($1,298.14) than the lower variable rate offer at 2.14% with a $1,482.17 payment. This didn’t make sense to them so they called us to see if they could meet with us to look at it.
We met and our analysis showed that we could get them a payment of $1,199.60 per month versus the banks offer at $1,482.17. A huge savings.
We then had to extrapolate to determine the effective amortization used to obtain the higher variable bank offer and payment. As it turns out the payment the bank showed was based on an effective amortization of approximately 23 years when the fixed rate payment was based on the actual and correct remaining amortization of 29 years. In other words 6 years less amortization increases the payment substantially. But why would the bank do this we all wondered? Was it a mistake?
The question was, why would the bank use different amortizations to show payments and not compare apples to apples? It was obvious that the fixed rate payment looked more attractive than the variable. But again why?
The truth is that the banks want everyone to go ‘fixed’ versus ‘variable’. Reason being if the borrower has to break the mortgage during the term due to moving, separation, divorce, job loss or relocation and even death of a spouse (stuff most think will never happen but does and the banks know this) the banks will make a lot more money from the penalty.
So we called the bank with Phil and Sue in our office and were told the variable rate payment was based on a 3 year ‘fixed’ rate payment, not the stated 2.14%. What? Even though in fact the fine print stated this, most people never read the fine print and if they do it is mumbo jumbo to them. This appears to be another tactic by the banks to get borrowers to opt for the fixed rate option because the variable payment is much higher. People always want the lower payment right? And the banks know this.
As it turns out Phil and Sue, we learned after probing about their future are planning to move next summer. We won their business over after showing them that typical penalties from our lenders are four times (75%) less. Case in point the bank penalty had any borrower taken the 2.64% ‘fixed’ option would be $9,695 as compared to $2,133 from our lenders, some $5,429 less. Incredible! Reality hits you in the face. You go to sell your house. You have to factor in Realty commissions etc., and if you ever get into a bank collateral mortgage when selling you must pay off all your other debt instruments with the bank like loans, credit cards, lines of credit etc., because they all become secured under a bank collateral mortgage. We never put you into one of those.
Folks, we invite you to bring your bank renewal offer in to us to look at because we can save you thousands of dollars, oh and by the way we will put you into much safer (non collateral bank) mortgage.
For your next mortgage isn’t it clear who you should choose? We don’t play games and we protect you. Please spread the word.