work on this article: http://www.atb.com/dev/mortgages/mort_extreme.asp
Discount mortgage; sounds like it couldn’t exist, doesn’t it? Well, they do exist and aren’t uncommon at all. A discount mortgage is simply one where the interest rate is extremely low, almost at the prime lending rate, for the first few years. The exact period of this “few years” varies widely from 2 to 7. After the first years, the mortgage rate can be adjusted, depending on the rate of interest that is current at that time.
The discount mortgage locks in a very low interest rate for five years. If you happen to know you won’t be staying in the same town for long and will place the home back on the market in, let’s say, four years, a discount mortgage would be great for you!
If you are planning to stay in the home your purchase for a much longer time – perhaps your entire lifetime – the discount mortgage allows you to grow your earning power before the mortgage is readjusted. Of course, if the interest rate goes far, far down, the mortgage will not be set to a lower rate than at initiation. But if interest rates rise, your mortgage discount interest rate will rise as well.
Here’s where you need to investigate all types of discount mortgages before you jump into one. Does the discount mortgage being offered at a discount allow you to be locked into a high rate of interest and include penalties for pre-payment? Does the mortgage rate “track” with the prime rate? What about early mortgage payoffs. What about mortgage refinancing? There are many questions to ask before you determine which discount home mortgage might be right for you and your family.
The “tracker” mortgage is a discount loan with an interesting option. For the first years, let’s say two, the interest tracks at 0.1% above the prime lending rate. After the first years, the mortgage tracks along at 1.4% above the prime lending rate. This type of discount mortgage is great if interest rates are staying low.
Remember the 1980’s? Interest for home mortgages went as high as 23%!! You could end up paying 24.7% on your home mortgage in a worst case scenario. One tracker mortgage lender has a large early payoff penalty, so you could, in effect, be truly locked in at what could be an exorbitant rate of interest and have no way out. Read all the clauses in any discount mortgage you consider.
Discount mortgages are easy to locate. Your local bank may or may not offer these mortgages. Many, many large lenders and Internet-based mortgage lenders offer or even specialize in discount mortgages.
Discuss the implications of a mortgage at a discount rate with your financial advisor. There are so many clauses and terms regarding discount mortgages from different lenders that you really shouldn’t sign anything without discussing it with your financial advisor. Again, especially with a discount mortgage, read every thing very, very carefully. And seek help understanding anything in the mortgage papers, especially discount clauses, that you do not understand.
If you don’t have an advisor, make an appointment to discuss the implications of discount mortgages with a local realtor who is not a mortgage broker and thereby has little interest in obtaining your mortgage, whether at a discount or conventional rate, for you. Of course, they will try to sell you a house, but you will need someone to help you there anyway. A Certified Public Accountant (CPA) could help as well.
A discount mortgage can be a God-send for some people; for others a mortgage with a discount will not work as well. If interest rates stay as low as they are currently, it would be a great deal to get the lower discount mortgage rate. However, you have to study the history of mortgage interest rates. In inflationary times, it goes up and it goes up fast. And no one knows exactly what mortgage rates will do!
So, go not lightly into the dark night of the world of discount mortgages without personal study, discussion, reassessment, and as much knowledge as possible. And be sure to read the fine print!
Special Mortgage Types
The 40 Year Mortgage
Buy to Let
Adjustable Rate (ARM)
No Cost Mortgages
Ready to Refinance?