Taking the time to understand mortgages is one of the most important thing you can do, outside of using common sense to purchase your next home. The two main differences between mortgages are variable rate and fixed rate, but it’s not so black and white.

7 Things To Consider When Picking A Mortgage

 

Key Takeaways:

• Mortgages are not a one-size-fits-all solution
• The best mortgage is one that suits your lifestyle and personality.
• If you compare mortgages from bank to bank, you can’t compare it based on rate, it has to be based on rate and rights.
• Bank employees might be compensated differently, depending on the mortgage they sell. Ask questions, and don’t take their first suggestion.
• Mortgages are as diverse as the housing market itself. Depending on your 5-year plan, your income, your down payment, and your tolerance for risk, the mortgage you choose can drastically impact your pocket.

The primary differences between variable and fixed-rate mortgages

Let’s start with the basics. Mortgages in Canada are usually amortized over 25 years and are payable in blended payments of interest and principal. But these mortgages are renegotiated every 5 years or so. So, every 5 years, you can shop for a new mortgage, or renew your current mortgage.

Mortgages are classed as either a fixed rate or variable rate. The title says it all. A fixed-rate mortgage is one with a fixed rate for the entire term. So, if you “lock-in” with a fixed rate for 5 years, and the mortgage rates go up, you still pay the same mortgage rate that you locked in at. However, the variable mortgage rate is usually less than the fixed-rate and will save you money, but it fluctuates with the market. If mortgage rates go up, your variable rate mortgage payments go up too.

 

Buyer Beware: The difference expands past the rate.

Be honest with your realtor and mortgage broker when it comes to:

• How long you plan to stay in the home.
• How much downpayment you can afford.
• What you want to pay monthly.

If you break the mortgage before the end of the term, you are eligible to pay penalties to the lenders. So purchase a home that you can foresee staying in for at least 5 years, or plan accordingly. Usually, fixed-rate mortgages carry larger penalties, although all mortgages and lenders calculate penalties differently. The lowest fee you can hope to pay is around 3 months interest payment, while some lenders may charge you in the 10’s of thousands.

Sometimes lenders allow you to “port” your mortgage mid-term. So if you are planning to move in 2 or 3 years, you can take your mortgage with you, and get another mortgage for the difference between the purchase price of your new home and the amount of your mortgage.

Mortgage Insurance (for downpayments of less than 20%)

All mortgages with down payments of less than 20% require mortgage insurance. The less downpayment you have, the higher insurance premium you pay. Mortgage insurance covers your lender in the instance you cannot afford to keep your home. However, if you contact your mortgage insurance company before you cannot make your mortgage payments, they can intervene and potentially give you a break from mortgage payments until a later date.

 

Never miss a mortgage payment. If you are unable to make your payments, contact your mortgage insurer and then your lender, and ask to defer your payments for a few months. If you cannot defer your payments, ask if you can move from a bi-weekly payment schedule, to a monthly payment schedule. Once you start missing payments, the banks will work quickly to foreclose on your property.

Once you’ve been served a foreclosure notice, it’s very hard to undo the process. If you are in dire circumstances and cannot meet your mortgage payments, there are lenders that will lend you the money to pay off your mortgage under the condition that you sell in the coming months. (Contact us if you need advice, advice is free.)

 

Plan accordingly to the market conditions.

In a market where prices are increasing dramatically, the bank might not believe the home is worth what you paid for it. The bank will not give you more than what their appraisers believe the home is worth. Have a plan with your mortgage broker and Realtor, that minimizes your financial risk. If you have a $200,000 downpayment and are buying a home for $600,000, your broker might suggest qualifying for a $450,000 loan with $150,000 down, and to save the $50,000 in case the appraisal comes in under the purchase price. In the instance the appraisal comes in at the purchase price, then you can put the whole $200,000 in as downpayment.

 

Become mortgage-free 10 years earlier

Finally, some mortgages allow you to pay down the principal at an accelerated rate. If you can afford to pay down the mortgage at an accelerated rate, you can drastically shorten the length of time it takes to pay off your mortgage, and save tens of thousands of dollars in interest.

For Example: A $390,000 loan, amortized over 25 years, at 3% interest costs $853.59 Bi-Weekly. With an extra $10,000 paid into the mortgage yearly, you can pay it off in 15 years and save $72,138.97 in interest.  Do the math yourself with this free app: http://cma.me/christolourantos

 

If you have any questions, concerns, or are looking for a partner in the real estate transaction, contact us.