Thanks Jen Mikla for sharing this valuable article with us and our clients!
Why mortgages aren’t ALL about rate…by Jen Mikla, Mortgage Architects
Sure your mortgage rate is important; getting a good rate will save you money. But sometimes a slightly lower rate can have MAJOR disadvantages that outweigh the small discount you are receiving. Some banks offer a slightly lower rate to pull customers in, but leave out some of the major features that you might want out of your mortgage. These “bargain basement” mortgage rates or “value mortgages” can put you at a major disadvantage. When shopping for a mortgage there are a couple key questions you should ask, besides “What’s the interest rate?”. Here is a list of questions to help you be a smart mortgage shopper and make sure you are getting everything you need out of your mortgage.
1. What are my prepayment privileges?
Ok so what does that mean? With most mortgages you have the ability to prepay without penalty a certain percentage in lump sum each year and increase your monthly payment by the same percentage. Most common prepayment privileges are 15% or 20%. Why is this important? Here is an example:
I have a client who likes to pay his mortgage off quickly. He likes to double up payments and put his yearly bonus directly on his mortgage each year, for him this is important. His mortgage specialist at the bank offered him one of these “special” rate mortgages and he was ready to sign. His realtor had him call me for a second opinion and I alerted him to the fact that likely he would be unable to pay his mortgage off at the rate he had become accustomed. I told him to ask a few questions and my suspicions were confirmed. So many clients just go in and sign their mortgage document and don’t know what questions to ask. This would have caused some serious frustrations and heartache for the client. He is now in a mortgage at a low interest with a 15% pre payment and the ability to do double payments.
2. What is the amortization period?
The number of years it takes to repay the entire amount of the financing based on a set of fixed payments. The higher the amortization period the more money you can borrow. Why is this important?
Let’s say you are buying your first home and you make $50,000/year. At a 25 year amortization qualify for a mortgage of approximately $228,000. While if you amortize the mortgage over 35 years you would qualify for a mortgage $ 272,000. That could mean the difference between a condo or a starter home. And the payment is exactly the same approx $1,150.00
And just for good measure another example: A couple with an 80K combined income over 25 years can potentially qualify for a mortgage of $380,000.00 with a payment of $1960.50. While the same couple over 35 years can qualify for $452,000.00 with a payment of $1973.10
3. What are my refinance and early payout options?
Some of the discounted mortgages tie you indefinitely to the lender unless you sell your property. Why is this important?
Let’s say you want to draw some money out of your home to build a garage or do a renovation. With some of these discounted mortgages the only way to pay out your mortgage early is to refinance with that lender. I deal with nearly 50 difference banks and mortgage lenders. At any one time the difference in pricing between any one lender can be as much as 1+% depending on product and the type of mortgage you are looking for. The rate they offer existing clients is not always the lowest rate available so the say 0.15% discount you received might cost you down the road. Depending what rates are at at the time you what to refi, it might be better to pay the mortgage out and move the mortgage elsewhere for either a better rate or a product that better suits your needs. You could be put at a major pricing disadvantage if you need to draw equity out of your home and that can cost you money.
I hope this gives you something to think about when it comes to your financing options. It’s always good to talk to a mortgage broker and get a second opinion because we don’t have any affiliation with any one bank and offer tons options when it comes to rates and features. It pays to have someone on your side doing all the work for you. And when it comes right down to it, I just want you in a mortgage you are happy with.
Jen Mikla, Mortgage Planner