Selecting the Right Mortgage
How to Select The Right Mortgage and Save Thousands of Dollars
Are you wondering which type mortgage is best for you? There is not one correct answer. Deciding which type of mortgage will best fulfill your needs can be difficult. There are so many types of loans and different term lengths. The right mortgage can save you thousands of dollars, while the wrong mortgage can put your house in jeopardy. A little research before choosing your mortgage can save you thousands of dollars in the long run.
There are several elements of a loan that should be analyzed. While one of these elements may suggest one type of loan, another may call for a different type. You must weigh each ingredient separately and collectively.
Answering the following questions will make the selection process easier:
How long do you plan to stay in this home?
The length of time you will be in the home will certainly play a part in determining which loan to apply for. If you only plan to be in the home for 5–7 years or less, you should seriously consider a variable rate loan. If you intend on staying 20–30 years, a fixed rate mortgage may be right for you.
How much risk are you willing to accept?
If you are the type of buyer that needs to know exactly what you will be paying each month for the term of the mortgage, a fixed rate mortgage will fulfill this need. The fixed rate loan, however, will also net a higher interest rate. If you are willing to take some risk of fluctuations in the interest rate, you may be able to receive a lower interest rate.
How much cash do you have available for upfront costs?
If you have the resources, you may want to make a larger down payment to lower your monthly payment. By keeping a higher monthly payment however, you might be able to shorten the term of the loan to a 15-year loan in order to pay it off quicker.
Any purchase where the down payment is less than 20% is considered a high-ratio mortgage, and the mortgage must be insured by the Canada Mortgage and Housing Corporation (CMHC) or Genworth Financial Canada (Genworth). The insurer will charge a fee for this insurance. The amount of the fee will depend on the amount you are borrowing and the percentage of your down payment. Typical fees range from 1.00% to 3.50% of the principal amount of your mortgage. This amount can be paid up front or added to the principal portion of your mortgage.
Other factors that you should consider:
A short-term mortgage is usually for two years or less. A long-term mortgage is generally for three years or more. Short-term mortgages are appropriate for buyers who believe interest rates will drop at renewal time. Long-term mortgages are suitable when current rates are reasonable and borrowers want the security of budgeting for the future. The key to choosing between short and long terms is to feel comfortable with your mortgage payments. After a term expires, the balance of the principal owing on the mortgage can be repaid, or a new mortgage agreement can be established at the then-current interest rates.
Open or Closed
Open mortgages can be paid off at any time without penalty and are usually negotiated for very short terms. They are suited to homeowners who are planning to sell in the near future or those who want the flexibility to make large, lump-sum payments before maturity. Closed mortgages are commitments for specific terms. If you want to pay off the mortgage balance, you will need to wait until the maturity date or pay a penalty.
Find out the rate the lender will commit to and how long the lender will guarantee it. Get any commitments in writing. As with any transaction, if it isn’t in writing it doesn’t exist.
Both approval and funding time should be considered. You don’t want to lose a prospective home because your lender takes weeks to fund your loan. A lender should be able to fund the loan within ten days.
Annual Percentage Rate
The Annual Percentage Rate reflects the cost of credit on a yearly rate and includes any points and fees in addition to the interest rate.
Don’t rely solely on someone else’s recommendation. You, not your friend, must feel comfortable with your lender. If you feel good about your lender and trust him, it will be much easier to trust his advice on what kind of mortgage will best suit your needs.
You should get several quotes from more than one lender so you have something to compare. Look at the various fees, the total cost, the interest rate, and more. Finally, decide on the right mortgage for you.
You should be able to comfortably make the payments and have enough in savings to cover at least three months of payments. This provides a buffer in case of layoff or any other possible tragedy that might occur during the homeownership.