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The True Cost of “Low Rate” Commercial Bank Mortgages

The True Cost of “Low Rate” Commercial Bank MortgagesSome 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!

Jay Voorhees
Founder | JVM Lending
(855) 855-4491 | DRE# 1197176, NMLS# 310167