Mortgage series: You are ready to buy a home! Now what?????

Before you hit the market, it would be a good idea to visit a bank or a mortgage broker to get pre-approved for a mortgage.

Before you hit the market, it would be a good idea to visit a bank or a mortgage broker to get pre-approved for a mortgage.  The lender will take a look at your salary, your existing debts and savings, your credit rating, estimated taxes and heating costs to determine the size of the mortgage you can afford.  In other words, the maximum amount a lender would be willing to loan you.  Your bank or broker will reach out to lenders (mortgage companies) on your behalf and secure rates for various types of mortgages that have different features associated with them.  The rate will be valid for a specific amount of time, so you will want to make sure you ask about that.  Your monthly or bi-weekly mortgage payments will go towards the principal (actual cost of your home) and the interest. A bit about the features:

Fixed versus variable rate mortgages

A fixed rate mortgage will keep the same interest rate for the entire term, which is usually about 5 years.  In today’s market it is quite common to secure a 5-year 3.5 per cent fixed rate. A variable rate mortgage will be lower than a fixed rate because there is risk associated with it.  Right how you should be able to secure a variable interest rate of 2.75 per cent, which fluctuates with the prime rate of interest.  If the prime rate increases, your variable interest rate will increase as well and you could find yourself paying a higher rate than a comparable fixed rate. Although your monthly payment would stay this same, it would mean that more of your payment would be allocated towards interest as opposed to principal and you wouldn’t be paying your mortgage off as fast as you had hoped.

Which one is best for you?  It depends on many things.  Many of us are not risk takers and would be happy to secure a fixed rate.  Some people are willing to accept the risk, because variable rates can work to their advantage in many instances.  You may also want to consider the state of the economy and interest rate forecasts in your decision.

The mortgage term versus the amortization period

The lender will likely offer you an amortization period of 25 years.  This represents the amount of time it will take you pay off the mortgage.  The amortization period can vary and will affect your monthly payment.  The longer the amortization period, the smaller the monthly payment, but remember this means that you are paying more interest!  The mortgage term is usually 5 years.  After 5 years, you will have to renegotiate your mortgage. This is really important.  Especially right now when the interest rates are so low.   The rate you lock into is good for the term, not the amortization period.  So this means, after the 5-year term the interest rate will likely change.  This could be good and bad.  If the rate goes down, you will be paying less however if the rates go up, you will be paying more.  When I got my mortgage, I performed a “what if” analysis.  I asked my lender to let me know how much the payment would be if interest rates rose by 1 per cent, 3 per cent or 5 per cent.  I wanted to make sure that I could afford the payment in 5 years if the interest rates increased.  

Open versus Closed

An open mortgage is a good feature to have.  An open mortgage will allow you to pay off the entire balance, without any additional charges.  Some mortgages will allow you to pay a portion of your mortgage in a given year without an additional charge.  Many mortgages offer you a few ways to do this.  For example, your may allow you to increase your monthly payment by 15 per cent once a year, pay an additional 15 per cent of the principal (outside of the monthly payments) or double your monthly payments.  Although you may have to win the lottery to maximize each of these options, it is a nice feature to have.  A closed mortgage would not permit you to make any payments outside of your regular monthly payment.  

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Sara Wick