The Costs of Generosity
Someone sent me an article this morning about a major bank that will be offering a program to help people get into a home by providing them with up to $10,000. Honestly, as I read deeper into the article, rather than sitting there and mumbling to myself that this is another cheap shot by the big boys to grab market share, I thought, “Good for them,” (and then I grumbled a bit about them grabbing market share).
There’s absolutely nothing wrong with this, and there’s nothing nefarious about it – this type of program is projected to help up to 20,000 families and individuals get into a home, and that’s a good thing. However, before any of you accuse me of becoming a shill for the big banks, let me make my point – because I do have one.
On a $200,000 30-year fixed mortgage at 4.5%, the principal & interest payment is $1,013.37/month. Over the 30-year life of that mortgage, the borrower will have paid $364,813.20 – that’s $164,813.20 that the bank will make off that loan. If this big bank added NOTHING (like, say, an increased interest rate) and spent $10,000 to get that new loan, that $10,000 is only 6% of the overall profit. Lest you think me a fool for believing a bank would just GIVE UP that 6%, let’s take this to the next logical step.
It’s HIGLY likely that the interest rate for this program is going to be at least a point higher than the going rate for a 30-year mortgage – they have to have SOMETHING to compensate them for “giving” away $10,000. Same amount ($200K) at 5.5%, the principal & interest payment is $1,135.58 for a 30-year total of $408,808.80 and a $208,808.80 profit. By adding that simple point, they increased their overall profit by almost $45,000. Still, there’s absolutely nothing tricky or underhanded about this: they’re offering a service that requires something in return, a higher interest rate.
For some people, this is a perfectly acceptable trade-off, and they’ll sign on all day, and twice on Sundays. Before anyone you know jumps at this “free” money, give them this little thought nugget to chew on and digest:
The difference between the monthly payment at 4.5% (the rate given to someone NOT accepting the “free” money) and 5.5% that comes with this generous program is $122.21. If you take $122.21 and invest it every month in something earning as little as 5% interest, you would have $10,279.48 in just six years. That’s over $10K in YOUR POCKET, not anyone else’s, and that’s a good thing, right?
Big banks have bigger fees, without a doubt. Someone’s gotta pay for all those commercials filled with beautiful people driving nice cars and acting like money is the least of their concerns. That’s not a slam on big banks (ok, maybe a LITTLE), just a fact. The $10K they’re “giving” you gets used up a lot faster by their fees and whatnot (I love that word).
Here’s my recommendation: GO to the big bank (I mean it) and have them put together a loan estimate for you (including all their incentives), and then come to us, a broker. And after we’ve helped you buy your house, come back in six years (or sooner) with that money you’ve saved and invested, and we can show you how to make even more money with it. THAT’s independence, for sure. Happy Independence Day!!!!!