If you’ve applied for a mortgage or renewed your mortgage you already know these processes can be stressful, time consuming, daunting and fraught with lots of questions. No doubt questions like: “Did I think of everything?”, “Am I getting the best rate?” and “Is my term right for me?” have crossed my mind over the years; they still do.
For today’s post during Financial Literacy Month #FLM2014 I thought I’d collate some mortgage tips for homeowners of all ages. This post is actually somewhat of a self-help article since I’ll be starting the mortgage renewal process within the next year. So let’s get into it…
Tips for the first-timer
- There are definitely pros and cons to renting and buying. Everyone must make their own decision on this. I firmly believe buying a home, at least right away when you start your working career, is not for everyone for many reasons. Consider making a list of pros and cons that will speak to you.
- Once you’ve decided that you want to buy, get pre-approved. This can “lock-down” the borrowing rate for the next 90 or 120 days so you don’t need to worry rate increases within the rate-holding period.
- As a first-time home buyer there are certain privileges you are entitled to. Make sure you do your homework and understand the benefits, conditions and implications of each:
- First-Time Home Buyers’ Tax Credit. This tax credit gives you a tax break on up to $5,000 of your closing costs.
- There is also the Home Buyers Plan. This program allows you to withdraw funds from your registered retirement savings plans (RRSPs), up to $25,000 in a calendar year. You have to repay all withdrawals from RRSPs within a period of no more than 15 years, repaying an amount to your RRSPs each year until your HBP balance is zero. There are more terms and conditions to be mindful of so check out that link above.
Tips for the second or third-timer
Even after you survived your first home purchase I can almost guarantee there are some lessons learned.
- Use a mortgage broker. Here are some of the benefits gained from using a mortgage broker:
- They gladly take your financial needs and “crunch the numbers” for you.
- They are less biased. Unlike banking representatives, mortgage brokers are not usually tied to any one bank, they work for you to get the best rate, terms and conditions from multiple lenders.
- You don’t pay them; they are compensated by the mortgage lender you choose.
- Be wary of cash back mortgage products. These come with certain fixed-rate mortgages and the effective interest you pay is usually higher than what’s available for other (non-cash back) mortgage products. With few exceptions cash back mortgages usually come with a higher total borrowing cost.
Tips for any-timer including those wanting to slay the mortgage (beast)
- Forget about mortgage insurance, for many reasons.
- Consider your goals. Is a paid-off home and becoming debt-free sooner than later important to you? Is investing (versus mortgage prepayments) more important to you? How long will you stay in your home? Answers to these questions help you determine the “right” mortgage. And only then can you determine the appropriate mortgage rate, amortization period and prepayment features for your needs.
- Shop early and often. Your existing mortgage lender will make you a renewal offer often just a few weeks before your current term expires. But there is absolutely nothing stopping you from shopping around before then and comparing mortgage rates.
- Flexible prepayment privileges rock. Personally, I’m looking for at least 20/20 pre-payment options at my time of renewal. This will allow me to increase my payments up to 20% of the original mortgage balance every year and/or increase my payment amount up to 20% each year. I also need the option to pay my mortgage weekly or accelerated bi-weekly.
- Be wary of the IRD. You may already know if you break your mortgage term you’ll be subject to a penalty – how big of a penalty will depend upon the type of mortgage you have and other factors. For example, if you have variable rate mortgage the mortgage penalty is usually just three months’ interest. If you have a fixed rate mortgage the mortgage penalty could be in the thousands; it’s the greater of three months’ interest or the interest rate differential (IRD). Some lenders have penalties as high as 3% of the mortgage principal or even 12 months of interest. If you think you might break your mortgage before it’s up for renewal I suggest you find a lender who discounts the mortgage penalty, go variable or at least take a short-term fixed rate mortgage. Check out this handy mortgage penalty calculator here.
- Go online. With my current lender I see the balance remaining on my mortgage and I get annual statements. Knowing the balance remaining is a motivating factor to slay the mortgage (beast).
- Compare mortgages easily. The DIY mortgage service called intelliMortgage greatly simplifies the mortgage research process. Like I mentioned above my mortgage term is up for renewal next year and I’ve already used the Mortgage Builder tool on intelliMortgage (affiliate) to build a “customized” mortgage so I only pay for the features I need. It let me compare my preferred term, a 3-year variable, to other options from seemingly every major lender.
The first-time homebuying experience can be a very challenging one to navigate. The mortgage renewal process isn’t necessarily a picnic either. This is why I think it makes sense to use online mortgage services to educate yourself and then work with a mortgage broker to get the best services and professional help at the lowest possible cost.
What are your tips or lessons learned for the first-time homebuyer or mortgage renewal process?