As the sub title of the It’s Your Money book says: tools, tips and trick to borrow smarter. Today, I have a huge insight into the tip for you, and the trick of the banks to share with you.
On a $250,000 home purchase, a good rule of thumb is that you may be able to negotiate a discount on the sale of around three to five percent. At five percent, that’s a saving of $12,500. A great deal, but nothing compared to the savings, or wasted money, that can happen with your mortgage.
Last week, a listener e mailed me, and he was rather choked, to put it mildly. Last year, he signed a five year variable rate mortgage with his bank, with an option to convert to a fixed rate at any time. Seems like a good idea on the surface, doesn’t it? He had the benefit of the low interest rate, but when it started to move up, he had the chance to lock in a fixed rate for the rest of the four years left.
Well, it seemed like a good idea at the time. I’m very proud of this listener, because, before he went back to his bank to convert this variable rate mortgage to a fixed one, he got two other quotes. Very smart. So he knew that he could get a 3.9% five-year fixed rate in the market.
Yes, this listener also knew he was locked into the other four years with his bank. His shopping around wasn’t to move his mortgage, because the penalties would eat him alive. It was to be ready to negotiate the fixed rate on the last four years left!
But, and it’s a big but: He didn’t read the fine print when he signed the five year mortgage. Yes, he could convert at any time to a fixed rate, but it was at the POSTED rates! Let me put that another way: There is no negotiating when you choose to switch the variable rate to a fixed one. It will be at full sticker price. And like car purchases, who pays sticker? Well, he did!
The difference between the negotiated rate in the market and what the posted rate was with his lender is now costing him $19,000 in extra interest for the next four years! The banks will offer a very attractive variable rate on a five-year mortgage, with the option to convert to a fixed rate. But the catch, and it’s an expensive catch, is that the conversion will be at the full posted rates. A discount now in return for huge additional profits later.
$19,000 is a staggering amount of extra interest that was totally unnecessary if the listener had asked the question and read the documents he signed with the renewal. If your mortgage is up for renewal, you need to get at least three quotes and ask a lot of “what if” question. If you’re buying a home, you’ll need to spend more attention to your mortgage options and choices than negotiating on the purchase price. After all, you buy the home once, but have to pay interest for decades!