Devil in the details with low-rate mortgages

Save long-term pain by reading the fine print

Consumers taking advantage of low mortgage rates from banks and brokers may not realize what they are truly getting – or in some cases what they're not getting.

Last week, Mortgage360 received three inquiries from homeowners whose respective mortgages went wrong with other brokers or banks. In all three cases, the homeowners had attempted to refinance their previous low-rate five-year fixed mortgages into new, lower-rate variable mortgages. In two of the cases, the new mortgage made it all the way to the lawyers only to be stopped at the last minute by the banks, which wielded a little-known clause in their contracts preventing their borrowers from refinancing their properties.

Unfortunately, avoiding the entire approval process and the frustration that goes with it was not a matter of knowing this clause existed before the new mortgage was approved, but before the existing mortgage was ever taken out.

Yet, borrowers today are making the same mistakes borrowers made three years ago when low rates were all the rage.

Consumers are focusing first on rate, and second on the contracts. Instead, they should be focusing on the catch. You know what they say when something seems too good to be true.

To think a 25-page mortgage document boils down to one thing (i.e. rate) is absurd. Those mortgage contracts are arguably designed to be confusing and to lock borrowers in for the most profits possible. Don't think a low rate means you aren't going to fork over more money to a lender.

I myself got caught in one of these too-good-to-be-true mortgages early in my career. On page 15 of a lengthy 30-page document, under a heading titled Repayment, the contract read, "You can payout this mortgage at any time within the first three years of your term," followed by, "only upon the sale of your property to a bonafide arms length purchaser."

What it should have said is, "You cannot pay off this mortgage at any time in the first three years unless you sell the property to someone you do not know."

The way the term was written caused both my lawyer and myself to miss this restrictive clause. It ended up preventing me from switching lenders and getting a better deal when it became possible to get a lower rate elsewhere.

Furthermore, if I had won the lottery or received an inheritance, they would have been able to force me to keep the mortgage. I don't know about you, but I don't think anyone should be obligated to carry a loan they can afford to repay.

Nolan Matthias holds a degree in Economics, is an Accredited Mortgage Professional, and the author of The Mortgaged Millionaire. Mortgage360 was founded by Nolan & Jen Matthias in 2010, and established itself as a standalone brokerage in November 2014.

Tagged: borrowers | Homeowners | Mortgage Rates | refinance | Sponsored