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Back to Mortgage section Learning Centre - Mortgages
Straight talk mortgage tips

We have assembled the following list of mortgage tips and questions to help you sort through the maze of options that a homeowner is faced with when dealing with a mortgage lender.
 
 

General Mortgage Tips

Mortgage Definitions

Mortgage Features & Characteristics

Mortgage Calculations

Questions to ask when shopping for a mortgage
 
 

General Mortgage Tips

If the payments are about the same, you will be further ahead financially by making payments on a mortgaged home rather than paying rent on a house or apartment.
Paying down your mortgage is like earning the interest that you are paying on it, tax free.
Making no attempt to repay a mortgage is the worst thing that a borrower can do.
The size of mortgage that you qualify for will be greatly affected by the level of your debt at the time of your mortgage application.
When renewing your loan or selling your house, look for options and features that afford you with the maximum amount of flexibility.
The faster you pay down your mortgage, the sooner you will have extra capital for investments.
Look for a mortgage that offers the best prepayment privileges.
Increasing the frequency of mortgage payments will reduce overall interest costs.
As a general rule, you should not spend more than 30 per cent of you gross combined family income on mortgage payments.
When purchasing a home, always remember that the price is negotiable and that you can make a counter offer.
Remember that flexibility allows a homeowner to exploit their cash flow and pay down the principal faster. The flexibility is negotiated before you sign on the dotted line, not after.
Shop around for the lowest possible interest rate when purchasing a mortgage or any other loan.
Beware of the mortgage pre-approval trap as it might have you paying too much for your dream home. Just because you can borrow a large sum of money doesn't mean that you should necessarily spend that much.
Remember that if you are changing mortgage lenders, the same qualifying factors may apply. You may be facing both legal and appraisal fees so investigate all associated costs before you act.
Shop around for the best deal on a mortgage before getting the pre-approval in writing. You can reduce the amount of interest paid over the life of your mortgage by opting for a shorter amortization period.
If you are guaranteed an appreciation rate that is a few points above inflation and the monthly costs of renting are the same as buying, it is a good time to purchase a home.
Typically, lenders are looking for you to invest 25 per cent of the appraised value as a down payment towards a home. They will normally advance the balance of 75 per cent.
If interest rates have fallen when the time comes to refinance your mortgage, continue the same monthly payment schedule to pay off the principal sooner than anticipated.
If your monthly mortgage payment is an odd amount, ask the lender to round it up. For example, paying an additional $21.92 per month on an $800 monthly mortgage payment may not seem like a lot but it amounts to several thousand dollars over the life of the loan.
Making weekly payments on your mortgage is an effective way of paying off the debt quickly.
When the interest rates of most lenders are at the same level, the only way for them to compete is through the terms and conditions of the mortgage.
Visit the bookstore to find publications on home ownership and obtaining a mortgage. A good example of this is The Perfect Mortgage (Stoddart) by Alan Silverstein.

Mortgage Definitions


1.   Five types of mortgages:

1
Fully open, no penalty or notice
2
Open, with a predetermined penalty or notice
3
Partially open (limited open) has no penalty or notice on the open portion of the mortgage
4
Partially open (limited open) has a predetermined penalty or notice on the open portion of the mortgage
5
Fully closed

2.  A closed mortgage means the lender is not obligated to accept any prepayments.

3.  An open mortgage allows repayment of any portion of the outstanding principle at any time during the mortgage term.

4.  A fixed term mortgage has a fixed payment schedule, interest rate and amortization period.

5.  A variable mortgage means that the interest rate may go up or down, which can lead to the risk of higher mortgage payments.

6.  A short-term open mortgage (six month open) can also be thought of as a variable rate mortgage with a short term guarantee.

7.  The term of a mortgage is the length of time the financial institution has agreed to provide you with constant terms. This period is usually from six months to five years, during which the interest rate and payment are constant regardless of market fluctuations.

8.  The amortization period of a mortgage is defined as the length of time over which you will repay your entire mortgage.

9.  The Interest Rate Differential (IRD) is the difference between the interest rate you are now paying and the current rate. For example, simplistically your rate is six per cent while the current lenders rate is eight per cent. Therefore, the IRD would be two per cent per annum. You may have three years until your mortgage reaches maturity, so multiply the two per cent annual IRD by three years to get six per cent.

10. Your debt ratio is the comparison of your total debt to your total assets.

11. Longer term mortgage rates reflect the security found in having a fixed payment over a longer term.

Features & Characteristics

1.  If you have the money, use your prepayment privilege to pay down your mortgage before asking your lender to calculate the refinancing penalty. The penalty will then be based on a lower amount.

2.  You can reduce the amount of interest paid over the life of the mortgage by making double payments on your mortgage as often as you are able to.

3.  If you "skip" a mortgage payment, you are adding to the interest portion of the outstanding balance. This will increase the interest costs over the life of the mortgage.

4.  Each time you ask the lender to change any part of the mortgage payment schedule or security lodged against the loan, expect them to charge some form of fee or interest rate adjustment.

5.  If you believe that interest rates will drop, get a variable rate mortgage.

6.  If you are thinking about switching mortgage lenders, find out if you are subject to "switch" or "transfer in" fees on the way out. Don't be discouraged however, as there are some lenders who are willing to pick up the fees on your behalf.

7.  Most lenders calculate interest on a semi-annual basis instead of in advance and charge it at the end of the interest calculation period. If this is not the case, you may find yourself paying more than someone who has the same base interest rate.

8.  Before signing, find out the cost of paying down the entire outstanding balance of the mortgage earlier than planned (for example, as a result of an inheritance or lottery win). Some lenders may not allow this or may charge a penalty of several months of interest.

9.  The interest rate on a variable rate mortgage fluctuates according to the market determined rate.

10. Five ways to prepay a mortgage:

1
On the anniversary date, pay a lump sum towards the outstanding balance
2
Increase the regular payment amount
3
Reduce the amortization period, choosing less than the normal 25 years
4
Increase the number of regular mortgage payments made during the year
5
Do all of the above

11. If your mortgage is due for renewal in the next three to six months and you believe that interest rates will go up prior to that time, check to see if you can renew early. A small penalty may be charged but if interest rates do rise, the long-term savings could be substantial.

12. Three ways to help determine the length of a mortgage:

1
Determine the length of time that you intend to stay in the house.
2
Determine if you are willing to take a risk on a short term and if you can afford the mortgage payments if rates go up.
3
Determine if it is important to know what your mortgage payments will be for an extended period of time.

13. Ensure that your mortgage is portable if you think that you might move before you renew your mortgage and you believe interest rates to be rising.

14. A current survey certificate or real property report is required by all lenders and it is the responsibility of the purchaser to provide it. As the average cost of a new certificate is around $450, you should check with the present owners to obtain a copy of their existing survey.

Mortgage Calculations


1.  If you made a $2,000 lump sum payment on a $100,000 eight per cent mortgage in the first year, you could expect to reduce the amortization period from 25 years to 23.6. The interest cost would also be reduced from $128,966 to $118,475 assuming that the eight per cent interest is constant.

2.  To get a better idea of how much a lender might advance, multiply your prospective down payment by three. For example, a $60,000 down payment should get you a $180,000 mortgage loan for a house valued at $240,000.

To access various financial calculators, click the following icon:


Questions to ask

  • Is the mortgage automatically renewable when it matures, or will I have to re-qualify?
  • Can I "skip" a mortgage payment?
  • If I have "doubled up" on a mortgage payment, can I "skip" a payment at a later date?
    If the current rate from the lender is higher that my contract rate when I wish to make a prepayment, will the lender provide a rebate?
  • Can I pay my property taxes directly or do I have to pay them through the lender? If they can not be paid directly, what interest is paid on the property tax savings account?
  • Is there any outstanding tax due on the property?
  • Can I sell the mortgage along with the house?
  • Is the prepayment amount based on the original amount, the current payment or the outstanding balance?
  • Can the monthly payment be reduced after it has been increased?
  • Can I take the mortgage with me when I sell the house? If so, can I "port" or "port/increase/blend"? Can I port and reduce the outstanding balance?
  • Who decides if my mortgage allows a prepayment?
  • When selling my house, what will the penalty be if the buyer is not allowed to assume the mortgage?
  • Will the full mortgage amount be forwarded on closing or is the adjustment date used?
  • How often can the mortgage be prepaid?
  • How long is the interest rate guaranteed before closing? Is there any cost?
  • Will I get the benefit of a lower interest rate if rates drop?
  • When will the "final" rate be set?
  • Can I convert an open mortgage to longer fixed term? What does this cost? What type can I convert to? Are there any fees associated with conversion?
  • Is the "early renewal" feature offered?

    Important legal Notice:- This information is provided as a guide and cannot be construed in any way fashion or form to be a replacement for proper legal advice, you should seek a professional in any mortgage related subject.




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