Bank’s Little Trick with Variable Rate Mortgage Penalties

I have in the past gone over how the banks charge a much larger payout penalty for fixed rate mortgages [see related articles below]. I pointed out that going to a straight mortgage (monoline) lender will save you a lot of money should you need to payout your mortgage early. Those of you who are in love with the banks said the solution would be to go with a variable rate, because everybody charges 3 months interest as a payout penalty. As a result, you get the benefit of staying with an organization you know, and having the same payout penalty.

Well, not so fast. Even though both monolines and banks charge 3 months interest, the banks’ 3 month interest is more! How can this be? When you get your mortgage, the banks have a posted rate and the rate they gave you. When you pay out a mortgage early, the bank penalty is based on the posted rate. Monolines have only one rate. The rate they gave you. There are no posted rates. So your payout penalty will be smaller.

And for those individuals who feel “safer” with the banks, I would just like to say the banks are not your friends. Think of all the fees and charges, the larger payout penalties and the shady mortgage insurance practice. Which one of these benefits you? Is having a branch at the corner of the street so important? Your mortgage payments are made through direct deposit. And finally you are borrowing money, not lending it. You don’t have to worry about whether your money is safe. You have their money. Not the other way around.