Mortgages: 7 Things You Don’t Want to Learn the Hard Way

Mortgages: 7 Things You Don't Want to Learn the Hard WayExperience is a good teacher, but when it comes to mortgages — whether you’re arranging a new one or renewing — learning by experience can be expensive.

The more you understand about mortgages and home equity lines of credit (HELOC) before you sign a mortgage contract, the more you can save in interest charges, lender fees, and other borrowing costs.

1. Consider the Source:

The internet is a great research tool, but separating unbiased facts from marketing and misinformation can be tricky.

Often we are most vulnerable when we are intent on learning about something important to us. Our guard is down. Be cautious about which content you act on, and where you share personal information. According to the recent 2011 Mortgage Consumer Survey, released by the national housing agency, Canada Mortgage and Housing Corporation (CMHC), the internet provided recent real estate buyers with on-line mortgage calculators (86%) and financial self assessments (54%). The most popular search-engine key words used by buyers included interest rates (86%), mortgage options (76%) and mortgage calculators (69%). This CMHC survey, and consumer information like it, is equally accessible to legitimate and not-so legitimate companies developing and selling financial services and products. Taking time to research and understand mortgage details is important, just remain sceptical of special deals and too-good-to-be-true offers. Print information you want to act on as proof of what a company is offering, so you can hold them to it.

2. What’s In It for Them?

Real estate and mortgage professionals, and the organizations they represent, may be offered referral fees — as money or incentive points — by lenders that want their business (that’s your mortgage).

Professionals should disclose (ideally, in writing) the conflict of interest before you make any decisions or sign anything. Can you receive the best interest rate and mortgage terms when the professional is distracted by an additional incentive?

Ask whether there is a referral fee or incentive involved in all “I’ve got a great …” recommendations you receive. Be sure you, not the professional, are getting the best deal. For instance, being led to a bank does not give you the range of mortgage choices that a referral to an independent mortgage broker would. Thorough professionals normally offer at least three excellent choices when referring clients to ensure consumers understand the full spectrum of choices open to them.

3. Will Match to Get Your Business

Most people shop around for the best price on appliances, cars, and vacations, but do little comparison shopping for the best mortgage terms. If they did, it could save tens of thousands, or more. Remember, it’s not just the interest rate but the total borrowing cost that you want the best deal on.

Use a mortgage broker for comparison shopping, and you’ll have the added benefit of their track record with lenders. Since the broker represents more volume than your one mortgage, you may get an even better deal.

One lender advertising a terrific rate or a line of credit feature will not be the only lender ready to provide that service. Just ask, and you may get that feature plus added benefits with a lender you prefer.

4. What Is the Real Cost?

It’s not just the interest, but the total cost of borrowing that is vital to understand. What will it cost you to pay off the principal early? What is the charge to set up weekly or biweekly payments? What if you have to switch back to monthly? What is the cost for shifting from variable to fixed? What is the total cost of discharging the mortgage if you sell your real estate? When will legal fees be added? Will cash backs have to be repaid? Ask about all situations since this mortgage will run for decades. Get all the details about cost before you sign.

The long-term implications of your mortgage are more important than a quarter-point difference in interest rate. For instance, should you choose a fixed rate or variable? If you cannot afford to be wrong about this choice, go fixed and pay off principal as quickly as possible. If you have a financial cushion, solid job, and little consumer debt, a variable mortgage may save you money. The risk is worth it since, if rates rise quickly, you’ll be able to cover additional expense.

Banks and other lenders do not make billions in profit by missing opportunities to charge fees and take bonuses (that’s penalties to you). They can also change their policies and offerings anytime they like.

5. Rates Up, Mortgage Size Down

As interest rates go up, the size of mortgage you qualify for goes down. Even if you are prepared to take on significant debt, you won’t be allowed to. With buying power reduced, you may have to settle for a smaller property or a lesser neighbourhood.

When interest rates are on the rise, a preapproval can make a financial difference to buying power. The borrower is approved at a rate that the lender commits to for a period of 60, 90, or more days, even if rates for the same term go higher.

Some lenders include heating and utility costs in calculating what a borrower can afford. This means properties with poor insulation and higher heating costs may only qualify for lower mortgages.

6. Who Knows???

Since most buyers, on average, spend almost a year planning their home or condominium purchase, they are often exposed to a few market and rate changes in the process. There are lots of economists projecting and calculating interest rate patterns, but no one knows what will happen next. It is probable that rates will rise, but when and how fast is anyone’s guess.

According to Mark Carney, Governor of the Bank of Canada: “With monetary policy continuing to be set to achieve the inflation target (2%), our institutions should not be lulled into a false sense of security by current low rates. Similarly, households will need to be prudent in their borrowing, recognising that over the life of a mortgage, interest rates will often be much higher.”

7. Buying Day Is the Big Unknown

How many houses, semis, or condominiums must you view to find the one you want to buy? When will you be able to make an offer and have it presented? Will the offer be accepted? Your new home may be the first or the 15th you see. It may be the first one you make an offer on, or the 5th. Not even the most experienced lender, mortgage broker, or real estate professional can predict how quickly you’ll find and buy your home. But they’ll all agree that doing your mortgage homework first gives you the flexibility to act quickly when the ideal home appears. Don’t get left with “if only I’d…” regrets, or be stuck with an unnecessarily-expensive mortgage.

Written by: PJ Wade