The other day I had this idea in the shower. It happened as my brain was still waking up in the morning. I find I get the best ideas in those few moments just after waking up and just before falling asleep. Unfortunately I never remember the latter.
I, like many people, have a 5 year fixed-rate mortage. We all have different rates (see my previous post) depending on when we took our mortgage and who our lender is. My rate is at 3.59%.
I'd noticed that rates have come down lately. I would have been in much better shape if I took a variable rate mortgage at say, prime - 0.5, but my partner and I decided that we wanted a fixed rate product so that we could sleep at night, so to speak. Our rate is a bit higher but it doesn't go up over the 5-year period, no matter what happens to the economy.
Each year, I can pay 10% of my total original loan amount toward the principal. So if my original loan was $300,000, I can put $30,000 toward the principal each year. I can also quadruple my payments each month and have the extra money go toward principle. These types of clauses are in every mortgage although the actuals numbers vary. I pay a little extra towards my principle each year, but nowhere near the full allotted amount. THAT GOT ME THINKING, I could take a loan at today's lower rate and max out my principle!!
So here's how it works:
1. Take a fixed-rate loan for the amount that you're allowed to pay towards principle at today's lower rate.
2. Pay that amount
towards principle. In my case, it was about $30,000. Now you have the same amount of debt in a fixed interest loan, but with
some of it at a lower rate.
In my example, here's what actually happened:
I am just about one year into my mortgage. I have four more years left in my five-year fixed rate 3.59% loan. Oe the one-year anniversary of my mortgage (coming up soon), I'm going to take a FOUR-YEAR $30,000 loan at 3.25% and pay that $30,000 toward my principle on my main loan. Note that this new loan is a four-year loan instead of five. That way it will end on the same date as my main loan. 3.25% is ING's four-year posted rate so my bank had no probem matching it. Now instead of having my whole loan at 3.59%, I have only most of my loan at 3.59% and $30,000 at 3.25%. If rates are still low next year, I'll repeat the process but I'll take a three-year loan. Then the next year I'll take a two-year loan, and so on. Each time I take a new loan, I save about $1000! Not too shabby for 15 mins worth of work signing papers at the bank.
Note that there is one side effect. My monthly payment goes up about 5% as a result. If that's a problem for you, don't do it!
Wednesday, 27 June 2012
Friday, 22 June 2012
How to Negociate Low Mortgage Rates
Choosing a mortgage lender and product is the second most important part of the home buying process after
choosing a home. If you're buying an investment property, it may be the most important because
you won't actually live in the house day to day, but you will have to
live with your payments each month.
To do this the right way will want to do a substantial amount of homework, but for my money it's worth it, because you won't wonder if you could have gotten better rates, or worry about rates going up, or anything that might keep you from sleeping at night.
The first step is to identify what makes you an appealing customer for a bank.
-You may have high income
-You might have a good credit score
-You might have had stable work for a few years
-You might be a recent graduate with earning potential
-You might be young and have a lifetime of mortgage payments ahead of you
-You might hope to get an inheritance one day
-You might have a large down payment or a high asset to debt ratio
If you don't have any of those characteristics, maybe you shouldn't be buying a house.
You need to find a way to make the bank salivate at the idea of trying to get you to be their customer.
The next step is to go into 3 or 4 reputable banks in your area - probably the one you use for chequing and two others, and make appointments to speak to mortgage brokers. I used three. In each meeting, don't forget to highlight the factors that make you an appealing customer (embellish a bit if you have to - I told them that in five years we would probably be upgrading to a larger house and if I got a good rate with them now, I would be likely to return the next time), and be candid about the fact that you're shopping around. Let them know that since you're shopping around, they should give you their absolute best rate that they would offer their most desirable clients, because otherwise another bank will likely outbid them. In my experience they would take a day or two to reply with rates.
Very soon you'll realize which banks are willing to bend over backwards to get you as a client. It will depend on which banks have had a bad month and have had trouble filling their new client quotas lately. You only need two banks to start a bidding war. Once you have two, you can stop looking.
Once you have your bidders you can start the bidding process. I spent about three weeks emailing back and forth between my two bankers, continually giving each of them a chance to outbid the other. This process is what ensures you have the best rates possible. At the time, 5.34% was the posted 5yr fixed, and prime+.5 was the posted 5yr variable. Bank-1's opening bid was 3.74% on the fixed and prime on the variable. After about 4 or 5 emails per banker, Bank-2's winning bid was 3.59% on the fixed and prime - 1.01 on the variable, plus waiving of all fees associated with discharging of the mortgage at the end of 5 years (which total about $600). Why should you pay $600 for someone at the bank to spend 20 minutes printing off loan finalization forms!?!
The savings associated with the bidding process alone was over $10,000. For my opinion, that was well worth the 30 minutes I spent writing emails. All of this was done in the two months between buying the house and the closing date. We were finally convinced of the value of the process when the lawyer said it was the lowest rates he had ever seen.
To do this the right way will want to do a substantial amount of homework, but for my money it's worth it, because you won't wonder if you could have gotten better rates, or worry about rates going up, or anything that might keep you from sleeping at night.
The first step is to identify what makes you an appealing customer for a bank.
-You may have high income
-You might have a good credit score
-You might have had stable work for a few years
-You might be a recent graduate with earning potential
-You might be young and have a lifetime of mortgage payments ahead of you
-You might hope to get an inheritance one day
-You might have a large down payment or a high asset to debt ratio
If you don't have any of those characteristics, maybe you shouldn't be buying a house.
You need to find a way to make the bank salivate at the idea of trying to get you to be their customer.
The next step is to go into 3 or 4 reputable banks in your area - probably the one you use for chequing and two others, and make appointments to speak to mortgage brokers. I used three. In each meeting, don't forget to highlight the factors that make you an appealing customer (embellish a bit if you have to - I told them that in five years we would probably be upgrading to a larger house and if I got a good rate with them now, I would be likely to return the next time), and be candid about the fact that you're shopping around. Let them know that since you're shopping around, they should give you their absolute best rate that they would offer their most desirable clients, because otherwise another bank will likely outbid them. In my experience they would take a day or two to reply with rates.
Very soon you'll realize which banks are willing to bend over backwards to get you as a client. It will depend on which banks have had a bad month and have had trouble filling their new client quotas lately. You only need two banks to start a bidding war. Once you have two, you can stop looking.
Once you have your bidders you can start the bidding process. I spent about three weeks emailing back and forth between my two bankers, continually giving each of them a chance to outbid the other. This process is what ensures you have the best rates possible. At the time, 5.34% was the posted 5yr fixed, and prime+.5 was the posted 5yr variable. Bank-1's opening bid was 3.74% on the fixed and prime on the variable. After about 4 or 5 emails per banker, Bank-2's winning bid was 3.59% on the fixed and prime - 1.01 on the variable, plus waiving of all fees associated with discharging of the mortgage at the end of 5 years (which total about $600). Why should you pay $600 for someone at the bank to spend 20 minutes printing off loan finalization forms!?!
The savings associated with the bidding process alone was over $10,000. For my opinion, that was well worth the 30 minutes I spent writing emails. All of this was done in the two months between buying the house and the closing date. We were finally convinced of the value of the process when the lawyer said it was the lowest rates he had ever seen.
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