Is it your first time to deal with a home mortgage? Maybe you’ve gone through the process a few times before. No matter what the situation, it always pays to compare what the rates are. It’s the only way to make sure you get the most value for your money.
Let’s take a look at some of the most frequently asked questions when it comes to a mortgage. This will help you figure out what your strategy should be.
How much can I afford?
You may have started window shopping for your dream home. You’ve seen your options and have started imagining how it would feel like, living in one of those beauties. But have you actually considered how much these could cost? Can you even afford them?
A lot of potential homeowners get brokenhearted because they stay in the dream but forget to prepare for it. Buying a home would mean saving up for the down payment. And this down payment will dictate how much your mortgage will be.
How much should you be prepared to pay? Well, down payments in Canada would normally range anywhere between 5%-10% for anything less than a million. Once you go beyond the 1M point, that down payment zooms up to 20%.
The thing about buying a home is that people often forget the additional costs. For example, when you pay less than 20% down payment, you’ll be obligated to buy mortgage default insurance. Lower down payments will also mean higher premiums. Add to that the property taxes, closing costs and a lot more.
So when you start computing for what you can really afford, think about all the possibilities. Don’t forget the extras. Otherwise, you might be looking at a wasted investment a few years down the road.
Which is better: a mortgage broker or a bank?
This is one common dilemma for prospective home buyers. There is often a confusion on who can give them the best deal – a mortgage broker, or their bank?
Deciding to work with a bank means that you work face to face with the actual lender. You can take charge of all the negotiations. This is even better if the bank you want to work with is an institution you’ve been dealing with for some time. This means you can talk to a single provider for all your financial needs. The fact that you’re a client also means they may be able to give you a few perks and discounts on the side.
The biggest advantage of working with a broker is the access to a wide range of options. You can check different rates from different lenders. You also skip the hassle of having to deal with negotiations and other tasks required to get the best deal.
Whether a bank or a mortgage broker is better would depend on your specific situation. That’s why we’re helping you make the best decision by cascading the different pros and cons, as well as by divulging the different rates that different providers have to offer.
Which is better: a fixed rate or a variable rate?
A fixed mortgage rate means that you agree to a specific rate to be paid over a period of time. The most common term is 5 years. However, you can go for a period as short as 6 months or as long as 25 years.
- No surprises! You already know how much you’re going to pay the entire time period
- It’s easier to plan your budget.
- The risks are lower because you know what you’re getting into.
- Locking in a specific rate will have an additional fee.
- Breaking the contract will cost you more.
On the other hand, a variable mortgage rate will be based on what the lender’s prime rate is. This prime rate is computed based on the economic conditions at that specific time. This is actually one of the basis when banks compute for the pricing in case of short term loans. Basically, as the prime rate goes up or down, your mortgage rate will follow the same trend as well.
- Your monthly payments are considerably lower when the prime rates go down.
- Breaking a contract would only mean paying 3 months in interest.
- When the prime rate increases, your monthly payments will be pulled up as well.
- Budgeting is challenging because of the uncertainty in rates.
At the end of the day, it will all depend on what works for your specific situation. You may be someone who wants to have everything planned and budgeted, no gray areas, just black and whites. If this is the case, a fixed mortgage rate would be perfect for you. But if you have more than enough in savings and would not mind the fluctuating rates, a variable mortgage rate gives you the better chance of saving more, especially when the prime rate remains low over a longer period of time.
Which is better: open or closed mortgage?
A closed mortgage gives you lower rates and is usually the more favored option over an open mortgage. It also comes in both fixed and variable forms. However, there is also a restriction placed on how much principal you can pay every year. If for example, you decide to pay everything off even before the term ends, you will end up paying additional in penalties.
If you want the option to pay your balance anytime before the term ends, then an open mortgage may be a better choice for you. This is perfect if there is a need for you to move in the next few months or years. It’s also a good option if you’re expecting a huge chunk of money anytime soon. The only problem here is that you’d also have to pay extra to choose this option.
What are prepayment allowances?
Some of you may be looking for some flexibility in terms of payments. You may want to increase your payments in months where you have better income, for example. That’s where prepayment options come in.
You can opt for a monthly prepayment option where you are given a percentage by which you can increase your monthly payment. Let’s say your monthly payments are $1,000. If you are given a 25% prepayment allowance, this means that you can easily increase payments to $1,250.
But what if you want to send a bigger payment towards the entire mortgage total? This is where the option for a lump sum prepayment allowance could be a good option. Instead of the prepayment allowance being applied to the monthly payments, it is applied to the principal being paid every year. A $100,000 mortgage amount with a 25% allowance would mean that you’re allowed to pay $25,000 every year, to be deducted against the principal.
What is a mortgage rate hold?
This is another term that may seem confusing to those with little knowledge about home mortgage.
Basically, the rate hold is a time period wherein you can choose to lock in the current mortgage rate. This is perfect if you find an interest rate to be favourable and would like to use that rate for the remainder of your payments.
Note that this is applicable before your renewal date comes up. Your renewal date is not the amortization period, but the date where the term of mortgage expires.
Let’s say you have a 5-year term on your mortgage. If you have a 90-day rate hold, this means that you can lock in the current mortgage rate 90 days before the term ends.
You may also want to read about:
- Fixed Mortgage Rates
- How To Balance Mortgages and Income
- Mortgage Renewal Facts
- Types of Home Ownership