Getting a mortgage can be intimidating and confusing, not only for first-time homebuyers, but also for people who have been through the process before. After all, your home will probably be one of the biggest purchases you will ever make, and mortgages are, accordingly, complex products. Although getting a low interest rate is one consideration -- and often the first one people think of -- it should not be the only or even the most important factor. I've therefore compiled what I feel are some of the most important questions to ask once you've begun to think about getting a mortgage.
1. Should I buy?!?
First of all, renting is not a bad word! We've all hear the spiel about how when you own, you are building your own equity whereas when you rent, you are building someone else’s. While this is true, renting has some amazing benefits that you just don’t get when you buy. (For instance, if the furnace dies in the middle of the winter, you're not the one who has to pay to fix it!) I rented for years while I was living in Vancouver, not because the housing market was too expensive, but because when a market is as uncertain as it is now, buying may be building equity -- or it may be trapping you into owning a depreciating asset. Therefore, if you plan to own for a short period only, it may not be right for you. I always try to ensure that clients are buying for the long term, and that owning a home makes financial sense for their circumstances. In selling investments, the regulatory bodies demand a “know-your-customer” process, which ensures you are matched up with the right investments. Why should buying a home be different?
2. How do I ensure my credit score enables me to qualify for the best possible rate?
There are several things you can do to ensure your credit remains in good standing, or even to improve it. For instance:
a) Pay down credit cards. The number one way to increase your credit score is to pay down your credit cards so they’re below 70% of your limits. Credit cards seem to have a more significant impact on credit scores than car loans and lines of credit.
b) Limit the use of credit cards. Racking up a large amount and then paying it off in monthly instalments can hurt your credit score. If there’s a balance at the end of the month, this affects your score – credit formulas don’t take into account the fact that you may have paid the balance off the next month.
c) Check credit limits. If your lender is slower at reporting monthly transactions, this can have a significant impact on how other lenders view your file. The best bet is to pay your balances down or off before your statement periods close, if possible.
d) Keep (and use) old cards. Older credit is better credit. If you stop using older credit cards, the issuers may stop updating your accounts. As such, the cards can lose their weight in the credit formula and, therefore, may not be as valuable – even though you have had the cards for a long time. Use these cards periodically and then pay them off.
e) Don’t let mistakes build up. Always dispute any mistakes or situations that may harm your score. If, for instance, a cell phone bill is incorrect and the company will not immediately amend it, you can help preserve your score by making the credit bureau aware of the situation while disputing the charge with the company.
3. What mortgage term is best for me?
The mortgage term refers to the period of time for which the agreed-upon mortgage terms and conditions will be valid. Selecting the mortgage term that’s right for you can be a challenging proposition for even the savviest of homebuyers, as terms typically range from six months up to 10 years. Longer terms usually mean a higher rate. There are so many factors that go into this decision that are heavily dependent on personal circumstance and the state of the economy, that simply going for the lowest rate is never the best solution. Your best bet is to have a candid discussion about your individual circumstances with your mortgage broker, who can then make a recommendation tailored to your situation.
4. What amortization period will work best for me?
The amortization period refers to the scheduled amount of time it will take you to fully pay off your mortgage. While the lending industry’s benchmark amortization period is 25 years and this is the standard that is used by lenders when discussing mortgage offers, shorter or longer timeframes are available – to a maximum of 30 years. A shorter amortization means higher payments, but less interest paid over the long term; a longer amortization means lower payments, but more interest charged over the long term. One thing to keep in mind is that it may be difficult -- even impossible, depending on the lender -- to increase the amortization of a mortgage. (You can, however, always decrease the length of the amortization.) Another thing to consider is that, by choosing a longer amortization period and taking advantage of prepayment privileges, you can retain greater financial flexibility while still achieving the benefits of a shorter amortization.
5. How can I maximize my mortgage payments and own my home sooner?
There are many ways to pay down your mortgage sooner that could save you thousands of dollars in interest payments over the term of your mortgage. Most mortgage products include prepayment privileges, whereby you are permitted to increase your payments by 15-20%, double your payments, or make a lump sum payment of up to 20% of the original borrowed amount once per year. This increase in your payment goes directly to paying down the principal on the mortgage. The catch is that most lenders will only allow you to choose one option; only a select few will allow you to use all three.
6. Will I be penalized for making lump-sum or other prepayments on my mortgage?
Most lenders allow lump-sum payments and increased mortgage payments to a maximum amount per year, without penalty. But, since each lender and product is different, it’s important to check stipulations on prepayments prior to signing your mortgage papers. “No frills” mortgage products offering the lowest rates often do not allow for prepayments.
7. If I want to move before my mortgage term is up, what are my options?
The answer to this question often depends on your specific lender and what type of mortgage you have. Some types of mortgages allow you to transfer your existing mortgage to a new property, as long as there isn't too much of a delay between the time you sell your home and the purchase of the new one; this is known as "portability." While fixed rate mortgages are often portable, variable rate mortgages are usually not.
8. Is my mortgage portable?
Fixed-rate mortgage products usually have a portability option. Lenders often use a “blended” system where your mortgage rate stays the same on the mortgage amount ported over to the new property, while any amount over the previous mortgage is calculated using the current rate. With variable-rate mortgages, porting is usually not available. This means that a three-month interest penalty will be charged if you break your existing mortgage, which may or may not be reimbursed with your new mortgage. While porting typically ensures no penalty will be charged when you sell your existing property and buy a new one, it’s best to check with your mortgage broker for specific conditions. (For example, some lenders allow you to port your mortgage only when your sale and purchase happen on the same day, while others offer extended periods.)
9. How do I ensure I get the best mortgage product and rate upon renewal?
The best way to ensure you receive the best mortgage product and rate at renewal is to enlist the services of your mortgage broker to get the lenders competing for your business once again, just like they did when you negotiated your last mortgage. A lot can change over a single mortgage term, and you can miss out on a lot of savings and options if you simply sign a renewal with your existing lender without consulting your mortgage broker.
10. If I have mortgage default insurance, do I also need mortgage life insurance?
You may, depending on your circumstances and insurance needs. Mortgage default insurance is required by lenders if you have less than a 20% down payment, and is intended to cover the lender's interest in the property. By contrast, mortgage life insurance is an insurance policy on the homeowner, which will allow your family or dependents to pay off the mortgage on the home should something tragic happen to you. Mortgage life insurance is meant to protect the homeowner's family rather than the lender.
11. Are there any other risks associated with getting a mortgage that I should be aware of?
As with any major purchase, there are unscrupulous individuals looking take advantage of unsuspecting buyers. The best way to prevent fraud is to be aware of what it is and how it’s committed. There are two major forms of fraud that are worth being aware of and guarding against. Mortgage fraud is a crime in which information on a mortgage application is deliberately omitted or misrepresented in order to obtain a larger loan than the lender might otherwise have agreed to; title fraud occurs when the title to your property is transferred to another individual without your knowledge. That individual then obtains a mortgage on this property and disappears once the funds have been advanced. Unlike mortgage fraud, victims of title fraud haven’t been approached or offered anything – this is a form of identity theft. I will detail some of the red flags associated with these types of fraud as well as ways to protect yourself in my next post.
12. Are you being honest with me?
Obviously, this isn’t something you can come right out and ask, but remember that everybody in the housing industry only makes money when you buy -- myself included. Be skeptical, and if you have a question, ask it. Don’t just assume that everyone is looking out for your best interest. And don’t be afraid to get a second opinion.
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