When comparing various financing options, the biggest mistake you can make is to concentrate on the actual nominal rates alone.
Instead, you should pay attention to the actual “Cost of Borrowing”, which is a combination of interest costs, plus the non-interest costs required to obtain, carry and close the mortgage.
Practically speaking, it is the amount of money that comes out of your pocket to finance any given project.
To determine the true cost of borrowing, you have to take into consideration the actual rate you’re getting, the associated fees (where applicable), but also the penalties for breaking the contract early.
For someone looking to finance a flip, what is the benefit of getting a low 5 year interest rate if the penalty for breaking your mortgage, once you’re ready to sell the property, is extremely high and it cuts into your profits?
Next time you’re comparing your financing options, don’t ask “what is the interest rate?”, but “what is the cost of borrowing?”. It’s simple as that.
Leave a Comment