So many questions for your mortgage agent
It’s an exciting time! You are ready to take that step and become a homeowner. There is so much information out there, so I wanted to answer some of the questions that I regularly get from clients and share them with you.
What kind of loan is best for your situation?
Is a variable mortgage better for my situation over a fixed mortgage? What about an interest-only loan?
To be able to answer this question properly, your mortgage agent needs to know your situation. Some key questions are as follows:
- How long do you plan to stay in your home?
- How much flexibility/tolerance do you have for changing mortgage rates?
It is important that with a fixed mortgage you are exposed to the interest rate differential (IRD) penalty, whereas with a variable mortgage your penalty, should you break your mortgage, is simply 3 months interest. All lenders calculate the IRD penalty differently. The IRD penalty at a big bank could be 3 to 4 times the size than at a lender that only offers mortgages.
An interest-only loan is where the minimum payment is simply the interest portion for that month. This option is great for business owners where cash flow is so important.
2) How can I pay off my mortgage faster?
There are 2 ways of paying off your mortgage sooner:
- Pre-payments. Most lenders will allow you to 15% or 20% of the outstanding principal to pre-paid each year;
- Increasing your payment frequency from the simple monthly, bi-weekly or weekly to the accelerated frequency.
So many homeowners opt for the monthly payment frequency and this puts them back many years from paying off their mortgage sooner. You may be asking yourself why is the accelerated frequency so important. Please contact me and I can explain the mortgage math at work here.
3) What are some of the common missteps made by homebuyers prior to obtaining mortgage financing?
Here are some of the top pitfalls:
- Buying a car with lease.
- The monthly lease payment sure will hurt your affordability ratios.
- Buying furniture for your new home before the closing dates.
- Lenders will run your credit report and the new credit balances on your report can result in your mortgage financing being denied.
- Missing payments for your telecommunication bills from Rogers, Telus, etc.
- These companies report to Equifax and Trans Union.
- Holding credit card balances at, or above the credit limit
4) What useful resources are available for first-time homebuyers and homeowners looking to refinance?
The 3 mortgage insurers have very useful websites for homebuyers, especially first-time homebuyers.
Click on the link for each insurer to learn more:
I offer clients a free mortgage consultation which can include running your credit reports and preparing an affordability analysis. Many times this consultation brings to light some issues which, when addressed, will lead to a cheaper mortgage and mortgage approval.
I also offer homebuyers a free mortgage app which will provide a very high-level pre-approval analysis. Check out my free mortgage app.
5) Why is the credit score so important? What are the drivers on my credit score?
Your credit score is sometimes referred to as your passport to buying a home. Clients with a strong credit score will be able to receive a better mortgage rate, with higher debt service ratios. Whereas, those people with a lower credit score, although receiving mortgage financing at an “A Lender” will receive a higher mortgage rate because their file is deemed to be slightly riskier given their lower credit score. Moreover, financing at a “Bank –A lender” will not require clients to pay a lender and broker fee. The lender pays all of these costs.
Did you know that your credit score can also impact your home insurance premium?
For those clients with weak and bruised credit, I can secure mortgage financing at an alternative lender, where the mortgage rate and down payment required will be higher. The long term goal here is to give the homeowners time to rebuild their credit so that in 1 to 2 years’ time, they can move to an “A lender”.
So what are the drivers of a person’s credit score:
- Payment history
- Amounts owed
- Length of credit history
- New credit
- Types of credit used
One of the most harmful things a person can do to their credit is have average credit card balances that are near or above the credit limit. Of course, missing monthly payments really hurts your credit score. Your credit score is your passport to better financial options.