One trick bankers and mortgage brokers have used to gain business since the beginning of the modern banking system is to use rates to their advantage. If one lender is offering a mortgage for 2.5% and the other is offering one for 2.79%, which one would a rational borrower take? We all know the answer.
But the world of mortgages isn’t nearly that simple. There’s far more to a loan than just the interest rate.
So-called "no-frills" mortgages are increasingly common these days. They combine very low interest rates with restrictive prepayment privileges and other limitations.
A normal mortgage comes with 20/20 prepayment privileges, which enables a borrower to pay back 20% of the principal and increase their payment by 20% each year. These are a nice perk for people who want to make big lump sum payments. A no-frills mortgage might not offer any prepayment privileges, or perhaps only 5/5 prepayment privileges.
Another thing to look for is the ability to refinance. A no-frills mortgage generally locks a borrower into the loan with no way to get out of it unless there’s a sale of the property.
The world of mortgages is a rational place. If you’re getting a lower rate, there’s generally a reason behind it. Make sure you understand just what you’re signing up for before putting your name on the bottom line.
