Know The Mortgage Basics
Whats a mortgage?
A mortgage is a loan that helps you buy a home. Its actually a contract between you and a lender to lend you money to buy a home. You repay the money based on the agreement you sign. But if you default , the lender has the right to take the property. Not all mortgage loans are the same. This article from the CFPB explains the pros and cons of different types of mortgage loans.
What should I do first to get a mortgage?
How do mortgage brokers work?
A mortgage broker is someone who can help you find a deal with a lender and work out the details of the loan. It might not always be clear if youre dealing with a lender or a broker, so if youre not sure, ask. Consider contacting more than one broker before deciding who to work with or whether to work with a broker at all. Check with the National Multistate Licensing System to see if there have been any disciplinary actions against a broker youre thinking about working with.
A broker can have access to several lenders, so they may be able to give you a wider selection of loan products and terms. Brokers also can save you time by managing the loan approval process. But dont assume theyre getting you the best deal. Compare the terms and conditions of loan offers yourself.
Can I negotiate some of the terms of the mortgage?
Decide Whether To Pay Discount Points
A discount point is basically a fee you can pay at closing to reduce your mortgage interest rate. Paying points can be worth it if you keep your mortgage long enough. If you refinance or sell within a few years, paying points may not be worthwhile.
- One point is equal to 1% of your loan amount, so if youre borrowing $200,000, 0.8 points would cost $1,600.
How much can you lower your mortgage rate by paying points? It depends on market conditions, but a rate reduction of 0.25% per point is a good benchmark.
How Some Lenders Can Offer Lower Mortgage Rates Than Others
Its always easier to find the lowest mortgage rates than to find the lowest borrowing cost. Thats because lenders like to add gotchyas to their mortgage agreements. These are surprises that boost your cost of borrowing later. Here are four examples of such pitfalls:
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Should I Use An Ontario Mortgage Broker
Ontario mortgage brokers often have the lowest rates in the province, particularly for default-insured mortgages. And theyre generally free of charge for qualified borrowers. Ontario brokers also tend to provide better advice than many lender representatives since they specialize in mortgages and deal with multiple lenders. Note that all brokers must be licensed by the Financial Services Regulatory Authority of Ontario. Heres a link to see if your broker is licensed.
The Bank Of England Base Rate Explained
With a mortgage, your interest rate is dependent on a few factors, including the Bank of England ‘bank rate’ or ‘interest rate’. The bank rate is the rate which the Bank of England , the central bank of the United Kingdom, sets to other banks on lending. They do this according to the demands of the wider economy.
As a general rule, the lower the BoE base rate, the lower the cost of borrowing, but also the lower your return on savings will be. When the BoE interest rate goes up, so does the likelihood of getting a better return on your savings, but similarly, the cost of borrowing will be higher.
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Do I Need Cmhc Insurance
UnderOffice of the Superintendent of Financial Institutions regulations, you are required to purchase CMHC insurance if your down payment is below 20%.
You may beineligible for CMHC insuranceif:
- your purchase price is $1,000,000 or above, or
- your amortization period is longer than 25 years.
In these cases, you must make a down payment of 20% or higher.
Typical Ontario Mortgage Amounts
Finding the right mortgage has a lot to do with determining what you can afford. And that depends on where you live.
Below are typical mortgage amounts for someone putting down 20% in select Ontario cities. Theyre based on a 30-year amortization and average purchase prices as tracked by the Canadian Real Estate Association :
- Barrie and District: $570,800
Thanks to Ontarios stable economy and housing market, it tends to have lower arrears rates than other provinces.
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How Your Mortgage Payments Are Calculated
Mortgage lenders use factors to determine your regular payment amount. When you make a mortgage payment, your money goes toward the interest and principal. The principal is the amount you borrowed from the lender to cover the cost of your home purchase. The interest is the fee you pay the lender for the loan. If you agree to optional mortgage insurance, the lender adds the insurance charges to your mortgage payment.
What Should I Do With My Mortgage If I Become A Landlord By Accident
If you’re an accidental landlord, for example because you were unable to sell your home after moving in with your partner, then you’ll need to notify your mortgage lender about the change in circumstances. Some lenders may let you continue to use your residential mortgage for a while, but usually they will want you to switch to a buy-to-let mortgage immediately.
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Primary Vs Second Mortgages
If you take out a second mortgage, it will also impact your rate. To access equity, some homeowners take out a second mortgage. Because your first mortgage takes priority, in the event that you run into financial trouble, your primary mortgage will be paid off first.
Due to the increased risk associated with these loans, second mortgages have slightly higher rates than primary ones. By contrast, in a cash-out refinance, you take out equity based on your primary mortgage and you can get a lower rate. In addition, you can roll your second mortgage into your refinanced primary mortgage.
Are Low Frills Mortgages Worth It
Restricted mortgages have boomed in popularity the last five years. Lenders realize that consumers want the lowest rate, so theyve tried to strip out features from their mortgages to get the pricing lower. For some borrowers who plan no financing changes for five years, low-frills mortgages may make sense. For most Canadians, the small rate savings isnt worth the much higher potential costs after closing. Those costs can bite you if you break, port, increase or otherwise refinance before your mortgage maturity date. Hence, for the majority of homeowners, its worth the small premium for a full-featured mortgage
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Questions To Ask Your Lender Or Broker When Getting Preapproved
When getting preapproved, ask your broker or lender the following:
- how long they guarantee the preapproved rate
- if you will automatically get the lowest rate if interest rates go down while youre preapproved
- if the pre-approval can be extended
Ask your lender or broker about anything you dont understand.
Consider Private Mortgage Insurance
Though they do count towards the overall cost of your mortgage, closing costs are a one-time hit. But there’s another bite that keeps on biting. If your down payment is less than 20%, youre considered a higher risk, and you may be required to carry private mortgage insurance, or PMI.
This makes you a safer bet for the lender. Trouble is, you’re the one paying for itto the tune of 0.5% to 1% of the entire loan each year. That can add thousands of dollars to what it costs to carry the loan. If you do end up having to pay for PMI, make sure it stops as soon as you’ve gained enough equity in your house to be eligible.
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Dont Make Any Big Moves
After doing all the work to improve your credit score and make yourself the strongest applicant possible, you dont want to do anything that might jeopardize your standing with lenders. This isnt the time to switch careers, nor is it the time to apply for additional credit. Try to keep everything the same as it was when you got approved for your loan.
Any big changes to your borrower profile could make you look riskier and force the lender to charge you a higher interest rate or even decide not to give you a mortgage at all. Your loan approval isnt really final until youve gone through the mortgage underwriting process. Dont give the underwriter any reason to think twice about letting you close.
What To Consider When Getting A Mortgage
When you shop for a mortgage, your lender or mortgage broker provides you with options. Make sure you understand the options and features. This will help you choose a mortgage that best suits your needs.
This includes your:
- payment frequency
You can find information on each of these features in the sections below. For more detailed information on each item, click on the links provided.
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How Can I Calculate How Much My Ontario Mortgage Payments Would Be
Our Ontario Mortgage Payment Calculator will help you figure out how much youll pay with any rate you find on the site. It only takes a few minutes to use, so give it a try. You can modify the mortgage amount, mortgage term and type, amortization and payment type to see how your mortgage options and payment amount are impacted.
Set Up Automatic Mortgage Payments
Sometimes, the simplest things can save you money. Some lenders offer a lower interest rate for customers who set up an automatic mortgage payment. Just keep in mind that, if you close your account or change banks, your original lending bank could remove the interest rate discount applied for setting up an automatic mortgage payment.
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Give Yourself Time To Switch Lenders
If you decide to switch lenders, you may be wondering when should I start looking to remortgage? The answer is as early as possible. Youll need to submit a mortgage application as though you are applying for a new mortgage, which means youll need to provide documentation including:
- Copy of your mortgage renewal letter
- Proof of income
- Proof you own your home
- Proof of property insurance
It usually takes a mortgage broker over a week to process your application, so make sure to leave plenty of leeway between when you start the process and when your mortgage is due to renew, otherwise you may end up sticking with your current lender for your next mortgage term.
Ask For A Better Mortgage Rate
With those little mortgage renewal slips, lenders make it too easy for you to answer the should I renew my mortgage now? question, by providing a quick and easy way to renew. They know youre busy and that youll pay for this convenience. On average, mortgage providers only offer their existing customers a discount off their posted rate on a renewal slip. But this isnt the lowest possible rate, even from your current lender. On top of that, there are usually lower rates available from other lenders.
Negotiating mortgage renewal for a better rate becomes even more important in a rising rate environment. Heres a chart outlining how much you could save by asking for a better rate on a $300,000 mortgage with a 20-year amortization.
Lets say your mortgage matures next month and that you had previously agreed to a five-year fixed rate at 2.74%. Your current lender may offer you a discount of 0.25% off the posted rate for a new rate of 4.89%.
That would mean monthly payments of $1,953.60. However, shopping around could mean securing a much better rate for the next five years. Maybe youll secure a five-year fixed rate at 2.94%. If you were to qualify at that rate, your monthly payments would be a much more manageable $1,652.13, saving you $301.47 per month.
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What Is A Mortgage
When you buy a home, you may only be able to pay for part of the purchase price. The amount you pay is a down payment. To cover the remaining costs of the home purchase, you may need help from a lender. The loan you get from a lender to help pay for your home is a mortgage.
A mortgage is a legal contract between you and your lender. It specifies the details of your loan and its secured on a property, like a house or a condo.
With a secured loan, the lender has a legal right to take your property. They can do so if you dont respect the conditions of your mortgage. This includes paying on time and maintaining your home.
Unlike most types of loans, with a mortgage:
- your loan is secured by a property
- you may have a balance owing at the end of your contract
- you normally need to renew your contract multiple times until you finish paying your balance in full
- you may have to meet qualification requirements including passing a stress test
- you need a down payment
- you may need to break your contract and pay a penalty
- your loan is typically for an amount in the hundreds of thousands of dollars
What Does The Future Hold For Mortgage Rates
Mortgage rates plumbed new depths in January 2021, setting all-time lows south of 3 percent. Rates have climbed a bit since then, and their trajectory for the rest of the year depends on the strength of the economic recovery. Given the robust rebound, the Federal Reserve has indicated it will ease back on its stimulus. That sets the stage for rates to rise. However, increases are likely to be gradual rather than sudden. Many mortgage experts expect rates to climb above 3.5 percent by the end of 2021.
Learn more about historical mortgage rate trends.
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Who Is An Adjustable
- Borrowers planning to sell their home within the fixed period. Youll enjoy a lower rate for the initial fixed term before selling your home.
- Those who afford significantly higher payments. If you keep the loan after the end of the initial fixed period, you could face lower rates, depending on market conditions.
- But youll want to budget for potentially increased rates.
Give Your Credit Score A Boost
Credit score and loan-to-value ratio are probably the two most important factors in getting the best rate. -Michele Skipper, Senior Loan Officer and a Credible mortgage expert
Improving your is one of the best things you can do to improve your interest rate. It also can increase your chances of getting a loan in the first place.
Even just a small boost in your credit score can make a big difference, too. Take a look at the recent rate data from FICO. If you had a score of 659 and were able to bump it up to 680, you could shave more than 0.60% off your interest rate.
Here are some quick and easy ways to improve your credit score:
- Pull your credit report and alert the credit bureau of any errors.
- Become an authorized user on another persons account.
- Ask for a credit line increase .
- If you dont have much credit at all, consider a secured card or .
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Use A Mortgage Calculator To Get Best Interest Rates
What is the best interest rate for a mortgage is not an easy question to tackle. Fortunately, you can use a reliable mortgage calculator to help you get insight into the probable monthly payments based on the inputs you provide.
Its advisable to try out different scenarios to locate the optimal mortgage with affordable monthly payments. The calculator will provide data on the total interest costs, too. For example, you might realize that if you make a larger down payment, you may swing higher payments with a 15-year home loan. To use a mortgage calculator, enter the essential details about the loan, including:
- Home price. The price at which you buy the home.
- Loan term. The period during which you have to repay the loan.
- Down payment. The money you pay upfront to buy a home.
- . The cost to take out the loan.
- Property taxes. The annual tax levied by your city or municipality as a property owner.
- Homeowners insurance. Your annual cost to insure your place and assets against theft, fire, and natural disasters.
- HOA fees. The monthly charge you pay to your homeowners association to cover the costs of maintaining and improving the properties within its framework.
You can change the variables to see how they affect your monthly payment, interest, and total loan cost. For example, if you choose a 10-year loan term, your payments will be higher, but youll pay less in interest. Conversely, you can decide to pay less each month, but your interest rate will be higher.