Mortgages can have downside

Published: August 03, 2010 3:00 PM in the Comox Valley Record

“Beware of more than just the rates when you’re shopping for a mortgage,” say mortgage brokers Paul Healey and Karen Ewing, partners at Invis in Comox Valley.

With rates near all-time lows, many people are now seeking mortgages for a home purchase, to help with debt consolidation through a home equity loan, or even for an investment property purchased during this buyer’s real estate market.

Unfortunately, too many people are wooed by low rates and don’t realize there are huge differences between one company’s mortgage and another — differences that can be costly if a consumer is not careful.

Consumers should talk with a mortgage broker who will ask the right questions before researching the best mortgage products available for each individual’s unique situation.

For instance, the terms of some loans include huge penalties for pre-payment, even if someone is selling the property.

Most mortgages charge the borrower the greater of three months’ interest or the “interest differential,” which is the difference between what the borrower would have paid in interest and what the lender can get by relending the money to a new borrower for that time period.

These penalties can be substantial and truly blind-side a borrower. For example, when a borrower wants to sell his house two years into a five-year mortgage, the company can charge the difference between the rate on the mortgage and the rate being offered on new mortgages. This calculation can differ dramatically from lender to lender.

So, if prepayment or a future move may be in the picture, the broker will look for a mortgage that allows pre-pays or does not have an interest-differential penalty.

Pre-payment penalties are not the only mortgage trap. Some people are sadly surprised when they want to refinance for some reason, but the mortgage won’t allow it.

Another important term to consider is “portability.” That simply means that a borrower can take his or her mortgage with him upon selling the property, which is a significant perk if rates go up.

The rate and terms of the mortgage are simply moved over to the new property and carry on as it was. An experienced broker can review these with a borrower to be sure the loan fits the borrower’s needs.

Even when a mortgage is portable, there may be limitations. For instance, some lenders will only lend for a home in a certain geographic area. If the borrower has any thought of moving during the time of the loan, portability should be discussed with the broker to avoid being shocked when that is not allowed.