How to Get the Right Mortgage that is Best for You
by Sabeena Bubber, AMP, & Chantel Chapman, AMP
Are you wondering which type of mortgage is best for you? There isn’t one correct answer. Deciding which type of mortgage will best meet your needs can be difficult. There are many types of mortgage loans to choose from with different term lengths. The right mortgage can save you thousands of dollars, while the wrong mortgage can put your home in jeopardy. It is important to carefully consider each mortgage option in relation to your goals, needs and financial resources. Doing this can help you make the right decision and save you a lot of time and money in the long run.
There are many different types of mortgages. To choose the right
one you need to ask yourself a number of important questions.
Every mortgage has several elements that should be considered carefully. While one of these elements may suggest that a particular type of loan is best, another may call for a different type of mortgage. It is important to weigh each element both on its own and as a part of the bigger picture.
The First Steps to Finding the Right Mortgage
Answering the following questions are the first steps in choosing the best mortgage and will make the mortgage selection process easier for you:
How long do you plan to stay in this home?
The length of time you will be in your 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 person that needs to know exactly what you will be paying every month over the term of the mortgage, then a fixed rate mortgage may be best for you. However, in the current interest rate environment, a fixed rate loan will result in a higher interest rate. So there is a bit of a trade off – a lower interest rate or a monthly mortgage payment that is carved in stone. If you are willing to risk an interest rate that fluctuates with the market, then you may be able to average a lower interest rate with a variable rate mortgage term as opposed to a fixed rate mortgage term.
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 mortgage payment. By keeping a higher monthly payment, however, you might be able to shorten the term of the loan to something like 15 years (rather than 25 or 30 years) and pay it off more quickly.
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 with Your Mortgage
Loan Term
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 Mortgage
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.
Interest Rate
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.
Loan Approval
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.
Mortgage Broker Reputation
Don’t rely solely on someone else’s recommendation. You, not your friend, must feel comfortable with your broker. If you feel good about your broker and trust her, it will be much easier to trust her advice on what kind of mortgage will best suit your needs.
You should talk to your broker to consider the various products as well as interest rates available. Look at the various fees, products, 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 your homeownership.
Sabeena Bubber & Chantel Chapman are guest writers for MyMoneyCoach.ca. Sabeena is President & Managing Broker at Integré Mortgage Partners, and Chantel is a Broker and Partner with the same firm. They are based out of North Vancouver, BC.