2.99%..So what's all the fuss about?

I came home from vacation this weekend to discover that last Friday one of the big five banks announced (through the media..tricky tricky..) a historic 5 year fixed rate of 2.99% (what the heck??) in an attempt to shore up their market share. The rest of the lending industry is working with an average 3.29% which was, and in fact still is the lowest rate ever historically offered when comparing apples to apples. The move to announce through the media made a huge splash and the media bit. Every news outlet from here to Timbuktu had it as "breaking news" and front page fodder. As you would expect this is creating allot of fuss.

The question is, what's all the fuss about? The devil is in the details.  The two mortgage products are simply not the same. My understanding is that these "deeply discounted" products are extremely restrictive, available for a very short time, eliminate the borrower's ability to get out of the mortgage for the full 5 years, force a 25 year amortization, drastically reduce pre payment privileges, eliminate double up or miss a payment options, all limiting increased equity, allow refinances only with the incumbent lender and last but not least, eliminate the borrower's bargaining power to negotiate at refinance or renewal time. These are basically the stripped down economy car of mortgage offerings with a catch... The car can only be serviced at the dealer. And when it comes time to sell, it can only be sold back to the dealer at a price they dictate. Am I saying this is all bad? Well no, I guess. If one likes to drive the most basic of cars with hands shackled to the wheel while hurtling toward a cliff with no way to avoid the inevitable plunge...then I guess it's great.

I for one am not advising borrowers to move to this type of loan for a mere 3 tenths of 1%, regardless of lender. In my opinion, flexibility is power. The power to manage debt is far greater than the power of a low rate with heavy restrictions. Savvy borrowers work toward debt reduction actively managing their mortgages by taking advantage of the perks and flexibility offered through sound mortgage structure not restrictive discounting. The bottom line is that actively managing a mortgage with plentiful pre payment opportunities and refinances calculated with discounted rates rather than posted rates can drive the cost of borrowing way down while also increasing the borrower's equity in the property.    

The bottom line is, when an already deeply discounted item is put on sale.... check the code date cause it could get smelly very quickly..

That's my two cents..

Have a great day all!!