3 Critical Things to Consider to Get the Best Mortgage for You
This week’s blog is the first of two by guest contributor Mandy Szucs, AMP. Mandy is a mortgage expert and the Principal Broker at Signature Mortgage Group in Oakville.
Why Looking Beyond Mortgage Rates is Important
It is easy to get caught up in the idea that comparing mortgage rates will guarantee you get the best bang for your mortgage buck. While this may be true for particular situations, there are many scenarios where this strategy is not effective. Following are three reasons why it doesn’t always pay to make a decision based solely on rates.
Your long-term plan and risk tolerance should determine which mortgage product is right for you. This product may or may not have the lowest rate.
For instance, there are cases where lenders will offer lower rates for insured mortgages. With insured mortgages, however, you’re charged an insurance premium, which is usually added to the mortgage amount. But if you’re not planning on keeping the property for a long enough time to offset that cost, it may be better to take an uninsured mortgage with a slightly higher rate. The cost difference you will pay with the higher interest rate may still be less than what you may pay in insurance premiums.
As another example, if you prefer to budget for a consistent payment and can’t handle rate fluctuations, it may be better to go with a higher fixed-rate mortgage. If you think current rates are low enough and you will be living in your property for at least five years, it may be wise to also opt for a mortgage with a longer term.
One of the biggest mistakes people make when merely comparing mortgage rates is failing to consider important factors such as prepayment options to help pay off the mortgage faster, whether secondary financing options are allowed, early payout penalties, or what fees are involved.
It’s not enough to simply compare mortgage rates because you have to know what “clauses” are contained within the mortgage deal. There may be cases where you will find a lender with the lowest rate and willing to pay for your closing costs, or even provide you with cash-backs after closing.
Lenders can change their rates at any time. As such, if you’re shopping for rates with one lender and then approach another that gives you a lower rate, it’s quite possible that the first lender has also dropped its rates. This is why it’s important to get pre-approved with a lender once you a mortgage that fits your needs. In some cases, you can secure your rate and conditions for up to 120 days.
These are just three reasons why it is not enough to merely compare mortgage rates. Your Mortgage Professional can provide options and go through your own personal mortgage plan to best select your mortgage lender and which product will be the best fit for you.
Fixed Rate vs Variable Rate Mortgage
The decision to choose a fixed rate vs variable rate mortgage is not always an easy one. It should depend on your tolerance for risk as well as your ability to withstand increases in mortgage payments. You can sometimes expect a financial reward for going with the variable rate, although the size of the reward will change depending on the economic environment.
Fixed rate mortgages often appeal to clients who want stability in their payments, manage a tight monthly budget, or are generally more conservative. For example, young couples with large mortgages relative to their income might be better off opting for the peace of mind that a fixed-rate brings.
A variable rate mortgage often allows the borrower to take advantage of lower rates — the interest rate is calculated on an ongoing basis at a lenders’ prime rate minus a set percentage. For example, if the prime mortgage rate is 2.45 percent, the holder of a prime minus 1.00 percent mortgage would pay a 1.45 percent variable interest rate compared to a 5-year fixed rate of 2.09 percent.
As a consumer, the best option is to have a candid discussion with your mortgage professional to ensure you have a full understanding of the risks and rewards of a fixed rate vs variable rate mortgage.
How Much Mortgage Can I Afford?
If you are looking for a new home, be sure you are pre-approved. With a mortgage pre-approval, a licensed mortgage professional can do a more complete verification and tell you how much mortgage you can afford prior to sending you shopping for a home, and with that done, the dollar figure you are going shopping with is actually what you can spend.
The mortgage professional that you work with to get pre-approved will let you know for certain how much mortgage you can afford based on lender and insurer criteria, and what your payments on a specific mortgage will be.
Licensed mortgage professionals can lock-in an interest rate for you for anywhere from 60 – 120 days while you shop for your perfect home. By locking in an interest rate, you are guaranteed to get a mortgage for at least that rate or better. If interest rates drop, your locked-in rate will drop as well. However, if the interest rates go up, your locked-in interest rate will not, ensuring you get the best rate throughout the mortgage pre-approval process.
In order to get pre-approved for a mortgage, a mortgage professional requires a short list of information that will allow them to determine how much mortgage you can afford. A mortgage professional will explain to you the benefits of shorter or longer mortgage terms, the latest programs available, which mortgage products they believe will most likely meet your needs the best, plus they will review all of the other costs involved with purchasing a home.
Getting pre-approved for a mortgage is something every potential home buyer should do before going shopping for a new home. A pre-approval will give you the confidence of knowing that financing is available, and it can put you in an incredibly positive negotiation position against other home buyers who aren’t pre-approved.
Check back in next week for another post from Mandy, where she’ll explore buying versus renting.