Switch – Case Study
June 12, 2008 7:43 am Case Study, SwitchA switch is what the mortgage industry calls it when a person who has a mortgage with one lender decides they are unsatisfied with their current interest rate and want a better rate. So they “switch” from one lender to another.
Generally these type of files are really simple for the borrower, the lender and the broker.
It is important the key aspects on file do not change from one lender to the next; for example:
- Amortization
- Mortgage Amount
- Borrowers
- Property
Case Study
George purchased a detached house in September of 2007 for $300,000. He used $15,000 as a down payment. He also took advantage of the 40 year amortization option. His mortgage amount at the time of purchase was $294,547.50 including the insurance premium.
At the time he got a 5-year fixed rate of 5.7% from lender A. His payments were $1,546 per month.
Nine months have passed and prime has come down.
George is wanted to know if he could switch his mortgage to a different lender and get a better interest rate.
He understood that he would pay a penalty and wanted to know how much it would be.
He called and let me know what he wanted to do so I took an application. The whole process took less than 15 minutes.
It is important to know that he did not want to change anything on his mortgage, just his interest rate.
After I had his information I asked him to send me some key data:
- Employment letter
- Recent paystub
- Most recent mortgage statement.
While I was waiting for him to send me this information, I investigated how much his penalty would be with his current lender. It came out to $4,139.80.
Then I figured out how much interest he would have paid for the duration of the term on his mortgage, and compared that to how much he would pay if he switched to a five year variable rate (assuming interest rates stay steady).
The total interest he would pay if he stayed with the fixed rate at 5.7% would be $65,108.08 for that period.
The total interest he would pay if he decided to switch to a variable rate currently at 4.15% would be $47,223.96 for the same time frame.
So even including his penalty of $4,139.80 he could save as much as $13,744 over the course of the next four years.
When I told George the news he was very pleased and ready to change. I made sure that he was aware that the prime interest rate will fluctuate and his real savings would likely be different.
I also made sure he was aware that he could choose to fix his interest rate at anytime to the best fixed rate available with the lender at that time.
He understood the situation and decided to move forward.
When I had all the paperwork and George’s “ok”, I submitted the data to the lender. The file was complete by the end of the following week.
George paid the penalty from his own funds and was surprised how easy the entire process was.
The morale of the story is – Ask me to give you the straight facts to help you determine if it is advantageous for you to switch your mortgage.
