Next Steps To Consider
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Risks Not So Variable
For small increases in the variable rate, your payments may remain the same. The only difference would be an increase in the amount going to pay the interest portion. However, if rates increase significantly, even by 1.5 per cent, the lender may increase your payments.
Before deciding on a variable rate, make sure the lender explains all the possible scenarios. Specifically, find out what interest rate changes will lead to higher payments. You may be able to include the option to lock into a fixed-rate mortgage at any time, but keep in mind that by then the longer-term rates may have changed.
to help determine the savings of going variable versus fixed. You may decide that the advantage isnt enough to pass up the certainty provided by a fixed-rate mortgage.
Factors To Consider When Choosing Your Loan
There are a variety of factors you need to think about when choosing a loan. The three most important are:
- Interest rate and fees. The interest rate is probably your biggest concern, as are the expenses that go along with the loan. Generally speaking, a shorter-term loan will be available at a lower interest ratebut the benefits of going shorter might diminish as you get closer to the shortest-term loans. For example, the rate might improve noticeably between a 30-year mortgage and a 15-year loan. It might still be quite a bit better between a 20-year loan and a 15-year loan. But the difference between a 15-year loan and a 10-year loan might not be as drastic.
- Monthly payments. The monthly payments on a loan with a shorter term might be higher than the payments on a longer-term loanbut the difference may not be as significant as you expect. The lower interest rate on a shorter term may wind up balancing some of that difference out to the point where you only pay slightly more for a shorter term. Be sure to compare your monthly payments for each loan you are considering.
- Amortization. A 30-year fixed-rate mortgage will typically have you pay mostly interest during the first few years of your loan. That means you may not even touch the principal for multiple years. But with a shorter term loan, you might start paying off the principal much sooner. You can get your lender to create amortization tables to show you what each loan will look like as you pay it off over time.
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What Are The Types Of Mortgages: Fixed Vs Variable
A variable mortgage rate fluctuates based on the so-called prime rate, a benchmark lenders usually adjust based on movements in the Bank of Canadas trendsetting overnight rate. When rates rise, homeowners pay more in interest. However, not everyone will see their monthly payments increase when rates climb. Some variable-rate mortgages keep payments steady up to a certain threshold even as the interest rate moves up. Instead, these borrowers will see their amortization period extended in response to higher rates, meaning it will take longer to pay off the mortgage. You can also lock into a fixed interest rate at any time, without breaking the mortgage contract and if you break the contract with a variable rate, the penalty is often much lower.
A fixed interest rate mortgage typically locks in payments for a set term of two to five years. Fixed rates are often higher than variable, but offers peace of mind to homeowners their mortgage payments will be consistent for the years to come. It is not possible to switch from a fixed to variable rate without breaking the mortgage contract .
What Is A Mortgage Rate
A mortgage rate is the rate of interest charged on a mortgage. While banks and other mortgage providers may advertise a particular percentage, the actual rate depends on the borrowers credit history, among other factors. Mortgage rates are currently at historical lows, but are not likely to get any lower for the foreseeable future. There are two main types of mortgages rates fixed and variable.
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Choose A Fixed Or Adjustable Rate Loan
If youre planning to stay in your home for at least a decade, a 30-year fixed rate loanwith relatively low monthly paymentsis your best bet.
If you can afford higher payments and want to dispense with the debt sooner, consider a 15-year fixed. It features a lower interest rate and could save you thousands over the life of the loan.
Another option is to choose a shorter-term adjustable rate mortgage . These mortgages feature lower rates for an introductory period, then a higher rate. On a 7/1 ARM, for example, the rate remains fixed for seven years. After that period, it can adjust annually based on market rates but can only increase a maximum of 5 percentage points above the original rate.
If you’re planning to be in your home for years to come, this may not be the best option, especially since fixed rates are attractive now. You don’t want to be in a position where your adjustable rate mortgage begins to adjust and you’re susceptible to a large payment increase, McBride says.
What Type Of Mortgage Loan Do You Want
Different types of loans have varying requirements, as well as their own pros and cons. Your options include the following:
Conventional mortgage loans
A conventional mortgage is a loan you can obtain from any lender that’s not federally insured or guaranteed by the government. These mortgages are available from private lenders, including mortgage companies, online lenders, banks, and credit unions.
Conventional mortgage loans are typically best for borrowers with good credit — generally defined as a FICO score of 670 or higher on a scale of 300-850 — as the requirements can be more stringent.
Lenders take a bigger risk when giving out a loan that’s not insured by the government, as the government isn’t guaranteeing to compensate the lender for losses if the borrower doesn’t repay the loan. If you take out a conventional mortgage and have a down payment of less than 20% — in other words, if you’re borrowing more than 80% of the value of the home — then you’ll have to pay private mortgage insurance . PMI protects the lender if you get foreclosed on, and it will cost you around 0.5% to 1% of the total mortgage value each year. For example, if you borrowed $200,000, you’d pay $1,000 to $2,000 annually for PMI.
FHA loans are loans that are issued by private lenders and insured or guaranteed by the Federal Housing Administration . If a borrower takes out an FHA loan and does not pay it back, the government repays the money to the lender.
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How To Compare Mortgage Loan Offers
Before you settle on a winner, its important to compare interest rates and fees offered by at least three lenders and/or brokers so you can be sure you have the best deal. Here are a few ways to compare the offers:
Interest rate. This is the most obvious way to choose between lenders, but it shouldnt be your only determining factor. Keep in mind that rates change daily, so youll want to be sure you have the right lender before you lock in a rate and finalize the application. Also ask about points, which are fees that may allow you to get a lower interest rate. Find out how much they cost and whether you need them at all.
Fees. There are a variety of fees associated with a mortgage loan. Not all of them are clearly understandable. Some lenders might list the fees individually while others lump them together. Ask about all of themincluding application fees, underwriting costs and others that are charged at closing. Compare between lenders and negotiate as many of the fees as possible.
Once you decide which offer is best for you, complete the application. As long as you have your paperwork in order and there arent any financial issues that arise before closing day, youve likely been through the toughest part of the mortgage process. You can look forward to signing your loan documents at closing and moving into your new home.
Set A Savings Goal For The Upfront Costs
Lenders not only want you to qualify for a large loan, they want you to have some money in the bank for the down payment and a long list of closing costs, too.
The down payment always seems like a big ask, but it’s to your advantage to cushion your purchase with a little instant home equity by putting down as much as you comfortably can. With a too-small down payment and with just a little downturn in the real estate market you could have a big loan and a home that’s worth less than you owe. Not a good place to be if you’re forced to make a move.
» MORE: See down payment assistance programs available in your state
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What About A Deposit
Saving for a deposit will mean you have the freedom to borrow less, and your Loan-to-value ratio will be lower and youll qualify for lower mortgage rates.
The loan-to-value ratio is the proportion of the amount you borrow in comparison to the property price. For example, a £30,000 deposit on a £300,000 home is 10% so the ratio is 10%.
That First Big Payment
A big down payment could be a great way to reduce the size of a mortgage. But people who dont have a lot of money saved and dont want to wait to save up a larger down payment can take on a high-ratio mortgage. Borrowers in Canada with less than a 20 per cent down payment must purchase mortgage insurance, which protects the lender in case of default. This could cost up to 3.35 per cent of the value of the mortgage and typically gets tacked onto the principal.
Options to consider when choosing a mortgage
Its important to consider these topics when choosing a mortgage:
- Open or closed
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How Much Can You Borrow
Mortgage lenders will typically lend between 4 and 5 times your individual income, or 3 to 4 times your joint income if youre applying for a mortgage with someone else. Every lender has different criteria for the maximum amount you can borrow. Affordability is also important: if you already have a lot of debt on credit cards or other loans, your maximum mortgage may be lower.
You should also think about how much you want to pay per month on your new mortgage. If your mortgage repayments are greater than 30% of your take-home income, you may find yourself house poor, where you own a house but cant afford to build up your savings, go on holiday, buy a new car, etc.
How To Choose A Mortgage
While becoming a homeowner is undoubtedly one of the biggest achievements in life, knowing how to choose a mortgage thats right for you can be a difficult task.
The type of mortgage deal you choose to go with can make thousands of pounds of difference in the long-term, so its a good idea to take your time and choose wisely.
There are lots of different mortgages available on the market, whether youre a first-time buyer or a seasoned investor. This makes comparing mortgage deals difficult, but our guide will aim to explain the important things to look out for when searching for the best mortgage deal to suit you.
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How To Choose A Mortgage Broker
This article was co-authored by Ryan Baril. Ryan Baril is the Vice President of CAPITALPlus Mortgage, a boutique mortgage origination and underwriting company founded in 2001. Ryan has been educating consumers about the mortgage process and general finance for almost 20 years. He graduated from the University of Central Florida in 2012 with a B.S.B.A. in Marketing. This article has been viewed 72,179 times.
Buying a house can be a daunting task, and for a first time borrower you might not know all the ins and outs that are involved in taking out a home loan. Its usually more beneficial to get home through a mortgage broker than directly through a lender or bank. Mortgage brokers are the professionals that match your needs with a home loan from a selection of lenders. But it’s important to choose the right broker – one who is knowledgeable, accredited, and covers a wide range of lenders.
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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Three Ways To Avoid A Mortgage
When couples in the church I pastor give birth to a child, I try to bring them a meal, meet the baby, see if they need anything, and pray with them. When Robert and Katy Cunningham had their fifth son, I went to see not only them and their new baby, but also their new living situation. They had moved into a broken-down motorhome that was sitting on the property where Robert was building their house.
When I returned home, I told my wife two things. First, I shared how proud I was of Robert and Katy for their commitment to being debt-free and all the sacrifice that was involved in sticking with that conviction. Second, I said, We dont have very much to complain about!
Not long ago, Robert finished the construction. They were able to move out of the motorhome and into their new house debt-free.
Maybe you have said, People cant buy a home with cash. I have heard this argument many times, and Robert and Katys testimony reveals it is not true. I have watched young and old people alike, inside and outside my church, purchase homes without mortgages. Here are three points of advice to help you do the same.
Should You Pay Off The Mortgage Or Save For Retirement
If you pay down the mortgage, you get a guaranteed return and the emotional and financial benefits of being mortgage-free. But if you focus on RRSPs first, you may well be further ahead in the long run. For young adults who cant afford to do both, it may be more tax-efficient to delay RRSP payments and pay off the mortgage early instead. Watch as Rob Carrick and Barbara Garbens offer further insights on this topic.
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Look At Smaller Players
In addition to considering a mortgage from the big banks and online lenders, research smaller, lower-profile players such as credit unions and community banks.
Search online with the name of your home state and terms like community bank mortgage, s& l mortgage, and credit union mortgage. We found lots of options this way.
Keith Gumbinger, vice president of HSH.com, a mortgage information website based in Riverdale, N.J., says these smaller lenders typically have better rates for ARMs and offer better terms and rates to people with variable income streams, like the self-employed.
Trust God To Help You Pay Off Your Debt Including Your Mortgage
Let me conclude with this: Dont delay getting out of debt. Dedicate yourself to making changes that will put you on the road to freedom from bondage. In the following chapter, we will discuss how we can eliminate debt given time, wisdom, and sacrifice. But for now, let me leave you with the following encouragement.
The battle to become debt-free is fought in the heart because this is where were tempted to be selfish and covetous. The Lord can enable you to resist these temptations, giving you the needed selflessness and contentment. Believe He wants to help you: Commit to the LORD whatever you do, and he will establish your plans .
If you are a Christian, you are Gods child, and just like earthly parents want to see their children manage their finances well, our heavenly Father wants to see us manage our finances well. Assuming God wants you to be debt-free, He will equip you to reach that wonderful goal.
Most of this post is included in my upcoming book, Your Finances Gods Way, and the accompanying workbook. Both will be published May 3, 2022. Keep checking back for details, or simply to receive updates.
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Conventional Vs High Ratio Mortgage
A conventional mortgage requires a down payment of at least 20 per cent.
If you have a down payment of less than 20% of the purchase price, youll have a high-ratio mortgage, which must be insured. The minimum down payment youre required to make is five per cent.
Mortgage loan insurance, usually from CMHC, protects the mortgage lender in case you arent able to make your payments.
The premium varies depending on the percentage you have as a down payment. Rates can be higher in certain circumstances such as irregular income, self-employment, or if more than one advance is being made. Typically they are as follows:
- 80+ 85% = 1.75%
- 85+ 90% = 2.00%
- 90+ 95% = 2.75%
You can pay the premium yourself but most people choose to add the funds to their mortgage.
With the low interest rates available today there is often no benefit in continuing to rent while trying to save 20% to eliminate the CMHC fee.
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