The True Cost of “Low Rate” Commercial Bank Mortgages
Some regional commercial banks are buying the jumbo loan market right now with very aggressive rates.
BUT – they come with an enormous cost that most borrowers do not take into account.
At one of the more prominent banks – that cost is a mandatory deposit equal to 15% of the mortgage!
In other words, the commercial bank might offer an interest rate that is 3/4% lower than what a typical mortgage bank can offer, but they require borrowers to deposit 15% of the loan amount into a checking account (for automatic payment withdrawals).
Let’s do the math.
A borrower with a $1 million loan will have to deposit $150,000 into a checking account that earns very little or nothing from that money.
The average return from investing in the S&P 500 was a tad under 12% over the last 60+ years, per Investopedia.
So, assuming that average return continues, that $150,000 in a no-interest checking account could earn close to 12% in an S&P 500 index fund – or $18,000 per year on average.
$18,000 is 1.8% of $1,000,000 – increasing the effective interest of that ostensibly low-rate mortgage by 1.8%!
Even if you assume a lowly 6% return from the S&P 500 index, borrowers are still giving up $9,000 per year of return and increasing their interest by 0.9%.
And – for those readers who are thinking… “dude, the market is tanking; who would want to invest right now?”
My answer is … me! – because the market is tanking, I am able to buy now on the cheap and likely get better returns.
In any case, as always, there is no free lunch.
FORCED LARGE DEPOSITS – IN EXCHANGE FOR LOW MORTGAGE RATES – ADD FAR MORE TO A BORROWER’S COST THAN MEETS THE EYE!
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