How to Shop For a Mortgage
When it comes to buying a home the process begins with mortgage affordability.. In Canada there are 2 options when shopping for mortgage. Either you can work with a mortgage broker or a lending institution like a bank. Mortgage brokers act in your behalf in order to find a mortgage product that suits your needs. If you choose to work with mortgage lenders you will be doing the negotiating. For more information on mortgage brokers vs mortgage lenders (banks) click here
Securing a mortgage is one of the most important steps when buying your home. Therefore, it is vital that borrowers are informed with mortgage features in order to find an ideal product that suits their needs and goals. When shopping for mortgages it is encouraged to get quotes from different sources to secure the best deal possible.
Important Factors to Consider When Shopping for a Mortgage
It is important to pay attention to mortgage rate trends. Its one of the most important aspects of mortgage, securing the lowest rate can save you thousand of dollars in the long run.
Although the mortgage rate is critical, it should not be the deciding factor when selecting mortgage. There are numerous other features, options, terms and conditions involved that may significantly affect a mortgage plan. It is important to carefully review the options and secure a product that suits your particular needs.
Conventional mortgage vs. High ratio mortgage:
A conventional mortgage allows buyers to borrow up to 80% of the purchase price. In other words buyers pays minimum 20% for the downpayment.
A high ratio mortgage allows buyers to borrow up to 95% of the purchase price. Which means downpayment can be low as 5% of the purchase price of the property. High ratio mortgages in Canada require mortgage loan insurance.
- Mortgage Loan Insurance / Mortgage Default Insurance / CMHC Insurance
Mortgage insurance is mandatory in Canada when the downpayment is less than 20% of the value of the property. It is intended protect the lender in the event that borrower is unable to make the mortgage payments.
The cost of the insurance varies based on the down payment amount. For more information and to calculate the insurance cost click here.
Open mortgage vs Closed mortgage:
Depending on your financial situation you can choose either an open mortgage or a closed mortgage.
Open mortgage allows the borrower to repay the mortgage at any time without penalties. Open mortgage is ideal for consumers who are planning on paying off the mortgage quicker than the mortgage term. Because of the flexibility, open mortgages generally have higher interest rates.
Closed mortgage does not allow payment flexibility therefore the borrowers must follow payment plan outlined in the mortgage agreement. Because of the lack of flexibility, closed mortgages typically have lower interest rates.
It is advised that individuals consult their mortgage professional to decide which product is suitable for their needs.
Variable rate mortgage vs Fixed rate Mortgage:
Home buyers have the option to choose whether mortgage rate remains is fixed (constant) or fluctuates throughout the mortgage term.
Fixed rate mortgage offers interest rate that is fixed during the term of the mortgage. Therefore, the payments remain constant which is ideal for consumers who are looking for security and stability. Mortgage payments are set in advance so the borrow doesn’t have to worry about rate changes. However, fixed rate mortgages have higher interest rates.
Variable rate mortgage is where the interest rates fluctuates depending on the changes on the market. Because of lack of security and stability, interest rates are lower.
Mortgage payment privileges:
Not all mortgages are created equally and they differ depending on the product or the lender. It is important to inquire about the pre-payment options and lump sum payments. These options offer consumers the ability to accelerate mortgage payments without incurring penalties. Some of the pre-payments options include percentage prepayment option, double up mortgage payment, lump sum pre-payment and payment frequency option.
Another important thing to consider when shopping mortgage is the penalties. Most mortgage agreements contain a pay-out penalties when borrowers break the term of the mortgage. These penalties can occur when borrowers decide to refinance or sell their home before the term is up.
In most cases, variable rate mortgage holders pay equivalent 3 months interest. Fixed rate holders usually have higher penalties – greater of the 3 month interest and interest rate differential.
Mortgage penalties are sometimes overlooked when shopping for mortgage. As mentioned earlier, not all mortgages are same. Consumers who are planning on paying off their mortgage earlier or thinking of selling before the term is up should opt for lenders that offer lower penalties. Consumers should discuss this point with their mortgage professional to avoid having to pay thousands of dollars for penalties.
Finally, it is encouraged borrowers to read reviews / testimonials of lenders they may be working with. This way borrowers are have an idea of what to expect from particular lenders.
Mortgage process can seem daunting with so many different products, conditions to consider. Working with a reputable mortgage professional can make the process smooth.
If you are looking to get started on your mortgage process, contact me for list of mortgage professionals who will provide the advice you are seeking and guide you to find the product that fits your needs.