Choosing a mortgage is an incredibly arduous process. Fixed rates, variable rates, deposit percentages and repayment plan options can make your head spin. So, before you reach the end of your rope, check out these expert tips on getting through the minefield that is mortgaging with your sanity – and your dreams – intact!
Choose a Broker or Bank A broker operates independently from banks, and has access to many different lenders and borrowing programs – which means he or she may often be able to find you the most competitive bang for your buck. A broker will originate a loan, process it and pass it along to the lender, who will then sell it to you for the negotiated rate. Particularly when an investor does not have perfect credit, and will likely have to shop around anyway, a broker is a good choice. But some investors feel ultimately uncomfortable with the fact that brokers find and negotiate loans, but are not involved thereafter – which means the investor is left to deal with the lender alone. In the end, it comes down to what you feel most comfortable with, and, perhaps more importantly, who can get you the best mortgage rate.
Plan Ahead “Get pre-approved,” advises Monster Mortgage broker Kristian Harris. “This will protect the current rate for 120 days while you go look around for a home. Clients can also get pre-approved with one or two lenders, especially when rate specials are coming out.” To do this, contact your broker or lending institution. And don’t worry – you are under no obligation, and if the time limit on your pre-approval runs out you can simply sign on for another one.
Find Your Dream Home The value of your home may very well dictate your financial security in the future, so choose this purchase carefully. Think hard about the stability and future of your home’s location, and always be realistic when it comes to the current state of your potential purchase. ‘Fixer-uppers’ make interesting choices, but you need to be practical about how much work needs to get done and whether or not you can afford it. If choosing to renovate, discuss working the costs into a mortgage with your broker or lender. Many institutions offer lines of credit for this very purpose.
Determine What You Can Afford Most lenders set lending ratios that ensure mortgage payments never exceeds more than a third of a person’s income. However, this may still be too much of a stretch for some, especially if there are other expenses, potential future income changes or simply a lifestyle to uphold. Once you find a home you love, start crunching numbers. Can you really afford the mortgage payments, and are you willing to scrimp and save every month? Mortgage rates fluctuate, life situations change and the bottom line is this: strapping yourself with debt may not always be the best move.
Think About the Consequences Harris recommends clients also review their current mortgage situations before entering into a new agreement. What are the penalties of exiting your current agreement, if you have one? Can you afford these penalties? Before you jump into a new mortgage, it’s key to understand how your next move may affect any agreements you may currently have with other lenders.
Learn About Fixed Mortgage Rates The first and most conservative option for investors is a fixed mortgage rate, which means monthly mortgage payments on interest and principal balance do not change. The interest rate is set for a defined period of time, and thus homebuyers can rest easy if lending rates start to climb. However, if lending rates fall, those bound in a fixed rate agreement will not benefit. “A fixed rate is best for people who get very nervous,” says Harris. “We call it the ‘sleep factor’. If you can’t sleep the night before the federal government meets to discuss the mortgage rates, then it’s better to be in a fixed rate agreement.”
Learn About Variable Mortgage Rates Rather than locking into a fixed rate agreement, investors who choose a variable rate agree to pay the current lending rate, which often changes. “We really try to educate clients, and show them the history of variable versus fixed over the past 15 years,” says Harris. “Historically, you’re better off taking the variable. We set up a strategy with clients, and suggest they set payments at a higher rate in order to build a cushion in case rates go up. In the long run, clients are often able to pay off their mortgage more quickly this way.” But, Harris admits, it’s impossible to tell what the next 15 years will bring in terms of rate fluctuation – so if you can’t stand the uncertainty, it’s better not to gamble.
Make a Decision After reading through the descriptions of fixed and variable rates, doing further research and speaking to a broker or bank, you should have a fairly clear picture of the risks and benefits of both rate options. Go with your gut on this one. Brokers and banks will lay out the pros and cons of each option, but they will not lead you in any one direction. Remember, you don’t have to lock into one type of mortgage rate for the rest of your life. You can try out either one for a year or two, then switch over if it just isn’t working for you or lending rates appear to be taking a turn for the worse.
Establish a Deposit and Repayment Plan “Once you buy, you need deposit money,” says Harris. Often, the best move is to put down as large a deposit as you can afford. This will lower your interest payments and get you started off on the right foot when it comes to paying off debt. It’s also a good idea to think seriously about a long term repayment plan. Rather than paying the minimum each month, search for ways to ramp it up. Being mortgage free is a beautiful thing, so make every effort to experience this freedom sooner rather than later!
Relax! With the home purchased, the mortgage arranged and the deposit paid, there’s little to do but relax and enjoy the ride. As the years go by, be sure to stick to your repayment plan and apply cash windfalls to your mortgage when possible, thus shortening the length of your days in debt. You may also decide to engage in home renovations, buy a second property or move up – so keep the number of your broker or bank on hand!