Mortgage Info
Let's Talk Mortgages, and Mistakes to Avoid!
Right off the bat, let’s talk about three major mistakes you can avoid to remove the pain, and increase the joy of the mortgage approval process. I deal with these throughout the site, but here’s a summary:
1. New car smell is overrated! Don’t do it! Nothing spells approval-killer faster than a new vehicle payment. That $800/month burden is going to seriously mess with your debt service ratio – one of the major criteria that lenders examine when they determine your eligibility for a mortgage. Keep your 2006 Civic until after you buy your home.
2. Banks are useful, but they are not your only mortgage resource. Don’t rely on your bank alone for mortgage advice. Of course they want you to deal with them – mortgages are incredibly profitable for banks. But speaking with a mortgage agent: someone who doesn’t work for any lender, opens up many possibilities that your bank simply can’t offer. And the good news is, as mortgage agents, we deal with many of the major banks, so you’re not excluding them when you speak with me.
3. Shopping for the best rate is not a DIY project – avoid this at all costs. Some folks figure they can rate shop themselves – speak with multiple lenders, find the best mortgage. Here’s the hard truth: you will NOT get a final rate until you’ve completed an application, and the lender sees your entire credit history. Doing this with multiple lenders will have a devastating impact on your credit score. It makes it appear as though you are “credit shopping.” Do NOT apply for a mortgage with different banks or credit unions yourself. Great news though – it’s totally possible to shop for the best mortgage, with a mortgage agent! We obtain your credit info ONCE, then we match you with the absolute best product available for your situation. That’s my job as a mortgage agent.
Ready to discover more mistakes to avoid, and good strategies to pursue in your mortgage journey?
So, does mortgage really mean death pledge?! You bet! But worry not – the death part refers to the repayment of the loan. In other words, the pledge is dead when it’s repaid. You’re free! Okay, let’s not get ahead of ourselves. There are lots of different kinds of mortgages, so let’s dive in!
First, we have a typical, first mortgage. This is what most people get when they buy a home, condo, etc. You’re borrowing from a bank or lending institution, choosing a fixed or variable rate (more on that later), and the repayment begins! Monthly, bi-weekly, weekly, the choice is often yours! Most mortgage products offer you the payment frequency option.
Wait – I’ve heard that increasing my payment frequency saves me money. Is this true?
Absolutely…not! This is a persistent myth that refuses to go away, and many lenders fail to fully explain what happens when you pay down your mortgage more frequently. Let’s dig in:
If you pay your mortgage monthly, you’re making 12 payment per year. Let’s say your mortgage is $3000 per month. You’ve made $36,000 in interest and principal payments in one year. If you pay weekly and keep the same payment structure, you’re paying $692.31 per week. This is going to result in very minimal savings. Yes, in years you make 53 payments instead of 52, you’ve made an extra payment. HOWEVER, if you choose weekly accelerated payments, the lender is going to typically increase the weekly amount. So instead of $692.31 per month, you may pay something like $724 weekly. This results in $37,648 toward your mortgage, instead of $36,000. This extra money results in hundreds of thousands in savings throughout the life of your mortgage, as it goes directly toward your principal, thereby saving you a lot of interest.
So item one on your mortgage menu: always choose accelerated payments, whenever possible.
Moving on, we have the ubiquitous HELOC. A home equity line of credit, or HELOC, is a loan secured by your home, much like your first mortgage. However, this differs in the sense that as a line of credit, you are only charged interest on the portion that you actually use. Check it out:
Tommy and Gina got a great mortgage through their agent, and 5 years have gone by. The home they bought for $500,000 is now worth $950,000, and they have $350,000 left on their first mortgage. Tommy and Gina decide that it’s time for a new kitchen – fun! But new kitchens aren’t free, even at Ikea. So they reach out again to Jon, their mortgage agent, and tell him they need $50,000 for a new kitchen (Gina likes granite). Jon gets to work applying for a HELOC, which will be a second mortgage on the home. Tommy and Gina can, subject to income requirements, borrow up to 80% of their home’s value, minus what they still owe. This is called the equity. So here’s how it works:
Home’s value: $950,000 x 80% = $760,000
Current mortgage: $350,000
So, maximum they could borrow in a HELOC: 760 (80%) -350 (current mortgage) = $410,000
Now, Tommy and Gina don’t want to owe 80% on their home, so they decide they only want $100,000. So Jon shops around and does the awesome work that mortgage agents do, and finds them a lender who will offer them a HELOC for $100,000. This will mean 2 things:
- Tommy and Gina now owe $450,000 on their home
- They have access to $100,000 to use as they please
So if they only use $50,000 of the HELOC, they only pay interest on that 50k. It’s important to bear in mind that HELOC’s generally have a higher interest rate than the first mortgage, because they are ‘second in line’ after the first (in the event of default), so the lender views this as a slightly higher risk. However when used properly, the HELOC can be a very useful tool to improve one’s home, or leverage the purchase of an income property.
Fixed or Variable? Help!
What about fixed or variable rate mortgages? My friend Skyler works at some bank, and he says we should always go fixed, for security and peace of mind. But my Uncle Kevin says variable is the way to go, because you always save money with variable. Who is right? This answer is going to totally not help, but here goes: They both are. Here’s the thing. Solid financial research has shown that variable rate mortgages, when averaged over the usual amortization of 25 years, generally outperform fixed rate. Moshe Milevsky, a professor of Finance at York University, has demonstrated this to be true. HOWEVER, These are crazy times for variable rate mortgages, and the discount generally offered to variable rate products is non-existent. So are you financially doomed if you choose a fixed rate mortgage? Absolutely not! For many, the peace and stability that a fixed rate brings pays enough dividends to offset the added cost that (usually) comes with a fixed rate mortgage over 25 years. And many thousands of people who chose a fixed rate over the past few years are paying far less interest (at least for now), than their variable rate counterparts.