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Mortgage Features Matter

Saving 0.1% or 0.2% on the interest rate doesn't help if you pick a mortgage with:

• The wrong term Assuming you don’t have extra money to prepay your mortgage, picking the lowest cost term is the single most important thing you can do to reduce your interest costs. If you save 0.10% on your interest rate upfront but pay 0.50% extra during your term (because you locked in too long) or 0.50% more at renewal (because you didn’t lock in long enough), that initial savings is all for not.
• Portability limits Some lenders make you close your old home and your new home on the same day if you want to “port” your mortgage. Others give you only 30 days to port. These short “port gaps,” as they’re called, are often impractical. They often require borrowers to break their mortgage instead of porting it, and pay a penalty that’s many times greater than a 0.10% interest rate savings.
• High penalties All major banks and certain credit unions and discount lenders have penalties that are up to 2- to 3-times normal, or more. That’s potentially thousands of extra dollars out of your pocket if you need to break your mortgage early.
• Refinance restrictions Refinance restrictions prevent you from freely refinancing. That means you pay more if you buy a new home and need to add money to the mortgage, or if you need to consolidate debt, or if you want to refinance to a lower rate.
• High rates on variable conversions If you decide to lock in your variable rate to a fixed rate, some lenders charge unfairly high fixed rates on that conversion. These rates can be up to one-half point above the best rates on the market.
• High rates on mid-term refinances If you need to increase your mortgage amount, some lenders charge inflated rates on the new money you borrow. As with conversion rates, some lenders “blended” rates (as they’re called) can be up to one-half point above the best rates on the market.
• Reinvestment fees For some lenders, a penalty is not enough. They’ll also charge you a reinvestment fee or abnormally large discharge fee if you break the mortgage early.
• Insufficient prepayment privileges Steer clear of zero or 5% prepayment privileges if there’s any chance you’ll need more than that. There’s no sense paying a penalty just to make a lump-sum prepayment. Also note that big prepayment privileges can potentially be handy for reducing your penalty if you break your mortgage early.
• A collateral charge A “collateral charge” mortgage lets you re-borrow from the same lender without a lawyer. The tradeoff is that it virtually forces you to refinance if you want to switch lenders. This can cost $1,000 or more, whereas “standard charge” mortgages can typically be switched for free, or near free.
• And so on...

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