10 Tips before getting a mortgage
Looking to get a mortgage on a new home that you are planning to buy? Or planning on refinancing your existing mortgage? Perhaps the renewal date on your mortgage is fast approaching, or you would you like to consolidate some debt? We have summarized some tips you can consider when shopping for a mortgage!
Home transactions such as first or second mortgages, investment property purchases, HELOCs, and refinancing, are the largest financial decisions you will likely ever make. We want you to be better prepared while making these decisions.
Here are 10 tips to consider before making that decision on a mortgage
It’s more than just the ‘Low-Interest Rate’
The right mortgage product for you is not always the one with the lowest interest rate. Even if a mortgage with a low-interest rate may be the best for you, its no guarantee! Other factors like prepayment, mortgage penalties, portability etc. are other important points to consider besides the interest rate. This is particularly considered for second mortgages and/or investment properties. In these cases, the interest rate is mostly not that important and just a small piece of the puzzle.
Prepayments are not always created equally
If you plan on paying off your mortgage as soon as possible, you would likely want a mortgage product that offers you a generous pre-payment privilege. Pre-payments are extra payments you are allowed to make above your regular mortgage payments without having to incur a mortgage penalty. Some lenders offer better pre-payment offers. For example, some lenders may offer to let you prepay 20% of your loan value as a lump sum on any of your regular mortgage dates throughout the year, while others will let you prepay 10% once a year, on your anniversary date. It is therefore important for you to choose a lender with flexible payment policies if you plan on paying off your mortgage quickly.
When refinancing your mortgage, or purchasing an investment home, an important thing to keep in mind is mortgage penalties. In most cases, you would want to choose a five-year fixed rate mortgage for the sake of safety and security. However, it is these types of mortgages that come with the highest mortgage penalties. If you feel that there’s a chance that you could break your mortgage before it’s term, it would be better for you to pick a mortgage with a slightly higher interest rate and lower penalties.
Understand the portability
If you plan on selling your home during the term of the mortgage and purchasing a new one, you must understand the portability of the mortgage. If you have a portable mortgage, you can take your mortgage with you when buying a new property, without incurring a high mortgage penalty. Make sure you read through the fine print. Not all portability clauses are the same. It’s not advisable to assume that your mortgage comes with a portability clause.
Standard or Collateral charges
Before signing up for the mortgage, make sure you check if it comes with a standard or a collateral charge. If you get your first or your second mortgage with a collateral charge, you may be able to take out a home equity line of credit later, however, it makes it difficult if you decide to move your mortgage when it comes up for renewal. This can cause your lender to less likely to offer you the best mortgage rates on renewal.
A budget for closing costs
When buying a home, remember to budget for closing costs. Closing costs include land transfer tax, real estate lawyer fees, and home inspection. The bank does not typically cover these costs for you and must be incurred by you. Similarly, in the case of HELOC, you will have to pay for the appraisal yourself. It is advised to budget approximately 4% of the value of your home as closing costs. If you are purchasing a home worth $500,000, it is advised to set aside approximately $20,000 for closing costs.
Don’t put your application at risk
When you apply for a mortgage, don’t do things that can put your application at risk. Some of the things that could hurt your mortgage application and risk it getting declined include quitting your job while in the middle of an application, make big purchases on your credit cards or take on an additional loan, like an auto loan. These factors can most likely affect your income and your credit, the two criteria lenders look at the most when considering your application.
Consult with a Mortgage Broker
Approaching your local bank can be a good first step, but it is always advisable to visit a mortgage broker who can give you a list of options and lenders to choose from. There are several benefits to picking a mortgage broker. A broker can shop around through a mortgage product that would best fit your current situation and provide guidance along the way, thus saving you time and money along with your credit score. You are more likely to find a better mortgage product with the assistance of a broker.
Your first preference might be a big bank. However, considering a monoline lender could save you thousands of dollars in interest over the span of your mortgage. Additional benefits might also include a less costly mortgage penalty if you break the mortgage down the line. It is, therefore, a good idea to keep your options open and consider monoline lenders while shopping around for your mortgage.
Shop around at your Renewal date
When your mortgage is coming up for renewal, it is a good idea to shop around with the help of a mortgage broker. You can save thousands of dollars by transferring to a better lender at the time of renewal rather than just continuing with the same lender. A mortgage broker can help you out through this process.
These are some tips you can use and consider while shopping around for a mortgage. You can always reach out to us for more tips and ideas while you look around. We at Oceanvale are happy to help!