Could an All In One Mortgage Cost an Extra $270,000?
By Kevin Estes
First-Time Homebuyer Example
A first-time homebuyer I met was excited about an all in one mortgage.
I hadn’t heard about it so I asked for more information and did some research.
What Is an All In One Mortgage?
An all in one mortgage combines elements of a:
checking account,
mortgage, and
Home Equity Line of Credit (HELOC)
Payments are applied to the mortgage principal and interest yet still available for withdrawal.
How much a borrower can have outstanding decreases over time. The credit amounts available at different years looks like a traditional amortization schedule.
To qualify, a borrower typically needs a large downpayment and very high credit score.
Convenience as the Primary Benefit
It’s certainly appealing to be able to borrow more money for a home without:
applying for a Home Equity Line of Credit (HELOC),
getting an appraisal, or
incurring additional fees.
That convenience comes at a cost. Products are more expensive at the neighborhood convenience store than the big box retailer!
The lender quoted the homebuyer 30-year interest rates of about:
9% for the all in one versus
7% for the traditional mortgage.
Paying Less Interest?
An all in one lender makes the claim that the entire payment reduces the principal balance and therefore reduces interest expense.
That initially sounds compelling.
However, it’s similar to how traditional mortgage amortization works. Reducing the balance and charging interest monthly is mathematically similar to paying interest with the payment.
Paying It Off Earlier?
Another claim an all in one lender makes is that borrowers can pay the mortgage off earlier.
That feature’s also available with traditional mortgages!
Prepayment penalties are rare for mortgages. In the event there is a prepayment penalty, it might only apply if someone pays off the entire balance early in the life of the loan.
Additional payments made on a traditional mortgage typically reduce the principal balance one for one.
Lenders often don’t care. Banks commonly sell mortgages soon after issuing them. That’s part of why conforming loans typically have lower interest rates - they’re easier to sell!
Flexibility, a Double-Edged Sword
A lender selling all in one mortgages claims borrowers can access equity with the ease of a checking account. That may be helpful for people with inconsistent income or temporary needs!
However, making it easy for borrowers to borrow runs counter to paying the loan off early.
Expensive Credit
That may also be an expensive funding option.
9% is higher than I like to see personal credit card interest rates!
Emergency Fund
An emergency fund is a more time-tested approach.
People with variable income or expenses may be ahead to maintain larger emergency funds. These balances might currently earn up to a 5% interest in a high-yield savings account.
Compare Apples to Apples
I object to how the all in one and traditional mortgage options were presented to the first-time homebuyer:
The traditional mortgage quote included property taxes and insurance in the monthly payment estimate.
The all in one mortgage quote did not.
There was a note that the all in one loan doesn’t allow property taxes or insurance accruals to be combined with the monthly payment. Those must be paid by the borrower separately. Calling it “all in one” seems like a stretch!
In my opinion, quoting one monthly payment with property taxes and insurance and another without is misleading.
It’s like comparing apples and orangutans!
An Extra $270,000
Estimating the total amount paid for loans of the same length is the great equalizer:
Start with the downpayment
Multiply the monthly payment by the number of months
Add the two and compare the total cash out of pocket
In this case, the downpayments were about:
$240,000 for the all in one
$200,000 for the traditional mortgage
The principal and interest payments were about:
$5,500 for the all in one
$4,850 for the traditional mortgage
All together, the all in one mortgage was scheduled to cost the homebuyer $1.98 million compared with $1.75 million for the traditional mortgage.
It was > $270,000 more for 30 years. That’s nearly $10,000 extra a year!
Assets Under Management
The lender went so far as to suggest all in one loans are good for advisors who manage assets. Apparently, the equity in the home can be used in advisors’ fee calculations.
However, that’s a potential conflict of interest. In my opinion, a fiduciary advisor who’s required to do the best thing for the client at all times would need to disclose and manage that conflict.
All In One May Be Appropriate
That’s not to say that an all in one mortgage is never the right solution. I was genuinely excited by the convenience of the product. In this case, it seemed expensive.
How About You?
Are you struggling with a complicated financial decision?
If so, feel free to…
Disclaimer
In addition to the usual disclaimers, neither this post nor this image includes any financial, tax, or legal advice.
