The mortgage process can seem huge and overwhelming.
It can be an emotional process because a mortgage is the loan you are taking to buy a home for yourself and your family which makes it infinitely more than just a loan. Or it may represent the loan you are taking to refinance your home to invest in business dreams or to clean up some debts after life has thrown you sideways.
Likely you will head out to get your loan and, if you are human, you are probably nervous about the whole process and whether you will even be approved.
The new guidelines brought into place by the federal government have made it harder and you may even feel that you deserve a medal by the end of the process after jumping through all the hoops.
The other part of the process is that we are inundated with information and we want to make sure that we are choosing the best mortgage that will protect us now and in the future. The easiest measure of mortgage ‘victory’ seems to be the interest rate we are offered.
What rate did you get is a hot topic after a home is purchased and it seems a no-brainer that the one with the lowest rate is the clear-cut winner in that conversation, but it is time to challenge that assumption and to do so we are going to look at just two normal situations.
The fact of the matter is that you need to look beyond rate. Of course it is important as the lower the rate, the lower your payment but at the end of the day there is more to it than rate.
The Case of the Mortgage Penalty – the client is a regular person. He or she has good credit, saved up the down payment and is ready to purchase a home. Receives two offers for the mortgage both at the best rate of the day. Chooses option A through her home bank as she likes the ‘security’ of bricks and mortar locations. Fast forward to down the road and sadly the client is separating and needs to pay out the mortgage. Had she thought to ask she would have known that the penalty is calculated very differently from lender to lender and she would have saved herself thousands; this information is readily available online and asking questions before signing is the way to go.
The Case of the Self Employed – the client is a hard-working tradesman guy who has saved 15% to put down on a home but needs to state his income given that he cannot verify it traditionally. Option A takes him to a mainstream lender who has to go through the mortgage insurer. Option B takes him to a B lender who will not through the insurer but charges a higher rate and a fee.
Let’s assume a mortgage amount of $250,000
Lender A – the rate is 2.79% for a two-year term and the mortgage insurance fee is 3.75%.
Lender B – the rate is 4.89% and the lender fee is 1%.
It seems simple until you realize that the difference between the two fees is $7,235 and even though he will pay a higher amount monthly, he will actually owe $3,000.57 less at the end of the term as he borrowed less overall.
So there was no so-called victory in achieving the lowest rate but the client did in fact save himself a lot of money.
The point is that your mortgage is made up of far more than a rate and the onus is on you to make sure you are getting the best mortgage overall even if you lose the water cooler bragging rights.
As you can see in just two examples, there is a lot of money that can be saved. The Internet is filled with so much great information from Canada’s mortgage professionals that it is actually easier than ever to know what to ask.
Pam Pikkert is a mortgage broker with Dominion Lending Centres – Regional Mortgage Group in Red Deer.