Yes 4.24% Can Be Cheaper Than 3.79%

2018-04-23 | 17:20:06

Interesting title isn't it? Many of you probably clicked on this wondering exactly how 4.24% can be cheaper than 3.79%. Well - it can be - and below is an example of the need for a proper mortgage and needs analysis.

When it comes to Mortgage Rates you can't simply look at the interest rate when figuring out the cost of borrowing. A good Mortgage Agent/Broker should point this out to you during the Mortgage process. Recently I had a client who has a slightly coloured history regarding their credit. Because of this history, they don't currently qualify with a regular bank. With their Mortgage coming up for renewal and their current lender offering 4.99% on renewal, this client was looking for options.

This was what the clients plan was at renewal:

Take out $5,000 to have in the bank
Sell the house within the next two years (retiring)
Switch Lenders
Owes $290,500 at Renewal
25 Year Amortization

With these things in mind, shopping the Mortgage was the next step. With a 'B' Level client there are many things to take into account including rates and fees. The best two deals available to the client were 1 year terms as follows:

3.79%, a 1% Fee and a $200 Renewal Fee
4.24%, a $1,000 Fee and a $0 Renewal Fee

Most people would instantly choose the 3.79% rate based on the rate alone. Borrowers have been conditioned that the lower the rate, the better the deal. In this case - that is not the case. Keeping in mind the criteria above. This is how these mortgages would look during the 1 Year Term:

3.79% Rate

$290,500 Owed + $1,000 Legal Fees + $5,000 Cash + 1% Fee = $300,000 (Rounded up to nearest $1,000)
$300,000 @ 3.79% = $1,544.10 Monthly Payment
Balance at Maturity - $292,625.81 (If renewed add $200)

4.24% Rate

$290,500 Owed + $1,000 Legal Fees + $5,000 Cash + $1,000 Fee = $298,000 (Rounded up to the nearest $1,000)
$298,000 @ 4.24% = $1,606.55 Monthly Payment
Balance at Maturity - $291,114.79

The key here is the Balance at Maturity. Knowing that the borrower is looking to sell within the next two years - owing less is a good idea (This client is retiring and moving) as they'll have more remaining after the sale. The difference here is a savings of $1,511.02.

Even when you consider the difference in payments of $749.40 as savings and take it away from the difference in balances - the borrower is still saving $761.62.
You can even consider using the higher payment for the higher rate on the lower rate.
- $300,000 @ 3.79% with a payment of $1,606.55 Monthly
- Balance at Maturity - $291,863.37. The borrower is would still be saving $748.58 with the higher rate.

You can see with these analysis that we don't even have to talk about renewing. The lender with the lower rate has a renewal fee, the lender that has the higher rate doesn't have a renewal fee. Through discussion with the borrower, odds are they would enter into an open mortgage at renewal with the idea of selling. The lender with the higher rate today, also typically has a lower Open Term Rate.

Overall with this analysis - 4.24% is in fact cheaper than 3.79% for this particular client.

It is important to note that each borrower will have different needs and concerns when purchasing, renewing or refinancing a Mortgage. It is important to know your needs and have them analyzed constructively. Each situation is different and your mortgage situation could have a different result than the above.

John Greenlee, Accredited Mortgage Professional - 905-377-1684

Mortgage Agent Lic #M10000667

Durhammortgage.com Ltd. Reg #10231 - Each Office is Independently Owned and Operated.