I’m quickly approaching the two year anniversary in my condo. Please don’t ask me where the time has gone because as usual, I have no idea. When I originally set out to buy my place, I was looking at pre-builds, I was living at home with no immediate need to move so I thought that was the way to go. Not really sure how the path went because it all went so quickly but soon as I was looking at existing condos. I think the thought of having to wait a couple of years, if it was done on time, and having to have someone else hold my money didn’t make sense for me so I bought a tiny little condo and haven’t looked back.
I know when I bought my place, the mortgage was one of the many confuses processes involved with buying a home. Recently I connected with Myhang Gibson on twitter, a mortgage agent and asked her if she would answer a few questions I thought most people purchasing their first home would have.
I’d like to thank (and apologize to) Myhang, not only did she get this information back to me so quickly, but she was patient while I had issue with the blog but now I can put it up!
What is the role of a mortgage agent?
An independent mortgage agent offers you more choices. When you deal directly with a bank, they typically have 4 or 5 mortgage products that they try to fit to you. Reputable independent mortgage agents shop all the various lenders and have one goal, and that is to get you the best mortgage possible. They provide advice and guidance by evaluating options best suited for each client’s individual lifestyle and financial situation. They explain the benefits of shorter or longer mortgage terms, the latest programs available, which mortgage products they believe will most likely meet the client’s needs the best, and to reviews all of the other costs involved with purchasing a home.
What is pre-approval?
When you are looking for a new home, it is the verification done beforehand so that the dollar figure you are going shopping with is actually what you can spend. This planning step is important because it allows you to know for certain what you can afford based on lender and insurer criteria, and what your payments on a specific mortgage will be. A pre-approval 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. A pre-approval will not only give you the confidence of knowing that financing is available, but it can also put you in a very positive negotiation position against other home buyers who aren’t pre-approved.
How does my credit history affect my mortgage?
Credit history is very important for a mortgage because lenders view past payment history as future payment habits. You need to be able to prove that you pay your bills on time. The longer credit history you have, the better.. so start building credit early. Having a low credit rating poses risks to the Lender, which may result in a decline for a mortgage approval.. or depending on your credit rating, you may still qualify for a mortgage but not at best rates. Even missing one bill payment can have a devastating effect on your credit rating, so even if you cannot make the full payment.. you need to make at least the minimum payment to maintain a good credit rating.
What are the benefits to pre-payment or biweekly mortgage payments?
By increasing your payment frequency, you will be able pay down your mortgage quicker but there is an important distinction: If you change to bi-weekly accelerated payments, then you will pay off your mortgage 3 to 4 years faster. If you change to bi-weekly regular payments, it will not pay your mortgage off any faster. Here is the difference. Let’s assume that your mortgage payment is $1000 a month with a total annual payment of $12,000. If you switch to bi-weekly regular payments, then your payments would be $462 bi-weekly. (That is $1000 times 12 months divided by 26 weeks.) You will not pay your mortgage off faster by doing this. Instead, if you switch to bi-weekly accelerated payments, then your payments would be $500 bi-weekly. (That is $1000 times 13 months divided by 26 weeks). This means that you pay one extra monthly payment per year. This will help you pay off your mortgage faster.
What is the difference between fixed and variable rates? What are the pros and cons to either?
A fixed rate is a rate that remains the same throughout the term of the mortgage. A Variable rate fluctuates with the prime rate, which is set by the bank of Canada and can change throughout the term of the mortgage.
Fixed Rate Mortgage:
Pros – As the rate is set for a specific length of term, the borrower’s payments do not fluctuate and is ideal for borrowers who want a fixed payment for their overall budgeting. The borrower will not have to be concerned about rate or payment increases during the term. Very good prepayment options are available allowing the borrower to pay off the mortgage faster.
Cons – As the rate is fixed, the borrower does not have the flexibility to take advantage of possible rate declines during the term. Discharge penalties fees are usually higher than a variable rate mortgage.
Variable Rate Mortgage:
Pros – Variable rate mortgages are based on a lender’s specific rate formula, for a specified term. Borrowers who are comfortable with payment and rate fluctuations are good candidates for variable rate products. In a “downward” rate market, the borrower will take advantage of paying less interest during the term. Discharge penalties can be lower and more flexible than fixed rate mortgages. If a line of credit product is chosen, you have the option of paying off or reusing the approved amount of the line of credit without re-qualifying.
Cons – As the rate is not “fixed”, payments will fluctuate with market conditions, and in an increasing rate market, the borrower’s payments could possibly increase to a level they may not be comfortable with. Increasing your required payment at the beginning of the term to allow for possible rate increases not only assists in budgeting, but also helps to alleviate payment increases if rates do go up; and you can pay off your mortgage faster, as more principal is applied due to the increased payment over and above the required amount.
In Canada, mortgage brokers are paid directly by the lender. Except for some cases where challenging specialty loans are required, there is no cost to the client. If you should happen to be in a unique circumstance, any fee would be disclosed and discussed before any work is started.
Myhang Gibson is an accredited mortgage professional with Neighbourhood Dominion Lending Centres. Her focus is to help clients build financial wealth strategies to enhance their lifestyle. Assisting them through the process of home buying, refinancing, and accessing home equity, she has earned an outstanding reputation for providing personalized service excellence taking the time to understand what matters most to the client throughout the mortgage process.
Thanks again to Myhang for answering these questions. What parts of home-buying/home-ownership confused (or still confuse) you?