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It’s Not All About Rate

If you are currently shopping for a mortgage interest rate, this article should be both helpful and insightful. When you know what you’re looking for you can ensure the conditions that sometimes apply to the really low interest rates fit your financing needs. And when you are educated and prepared to negotiate, the rate shopping process can go a lot quicker. Here are a few key details you should be prepared to discuss when you’re seeking mortgage financing.

Projected Closing Date – some interest rates offered by the many mortgage lenders come with different rate hold periods and knowing if you are closing in 30 days or 6 months makes a difference. If you’re just looking for a pre-approval rate, be prepared for the interest rates to be a bit higher as the really low rates are presently only available for “live deals”. Live deals being a purchase with an accepted offer, a mortgage refinance, or renewal.

Qualifying Income Type – You need to know your qualifying income type.   Some lenders will add a premium to the interest rate if you are self-employed and “stating” your income, in other words, you cannot provide Notice of Assessments from the government confirming required income.

Downpayment or Equity Amount – This affects whether or not your mortgage will be insured by one of Canada’s 3 mortgage default insurers. Some lenders offer lower interest rates when your mortgage is insured as this means less risk for the lender. The magic number is 80%, and if you’re financing over eighty-percent of the home purchase price your mortgage will likely require default insurance.

Property Occupancy – If the subject property is a rental, make sure you disclose that as some best rates only apply to owner occupied properties.

These are the main details you should have upfront before speaking to a mortgage professional. This ensures that preliminary rate quotes and rate information you are getting is accurate and applies to your mortgage financing needs.  Below you will find information on determining what type of rate you should be asking about.

Qualify For the Most

Some mortgage terms have a higher qualifying rate which can impact the maximum mortgage amount you are approved for. A 5-year fixed term (or longer) will enable you to qualify for a higher amount than a variable rate, open term, home equity line of credit or fixed term of less than 5-years.  The reason for this is with a 5-year fixed term or longer, you can qualify at the contract rate you receive, rather than at a higher qualifying rate which is set by the government. It is the benchmark rate that is at 4.64% today. For example, all application details remaining the same, the decision between selecting a 4-year term or a 5-year term can make a difference of $68,500* in maximum mortgage amount when shopping in the $300,000- $400,000 price range.

Payment Stability

If you are budget sensitive and prefer a monthly mortgage payment that will remain consistent during your term, go with a fixed rate as you will have a steady payment for the whole length of the mortgage term selected. I find the 5-year fixed rate seems to be the most popular, though a 10-year term can provide you with long-term payment security at only about 1% higher. If you’re flexible on payment amount, don’t be afraid to consider a variable rate mortgage as those that take them typically see interest savings over their fixed rate counterparts in the long term.

Maximize Your Pre-payment option

A lot of closed mortgage terms offer pre-payment privileges of 15-20% of the mortgage amount per year.  This can allow you to pay off your mortgage quicker and if you need a mortgage that offers more flexibility than a closed term, look into a home equity line of credit or open mortgage term.  This eliminates a payout penalty and allows you to pre-pay as much as you want, whenever you want.

Looking For A Short-Term Mortgage

If you are thinking of selling in the near future there are a couple of options available to you that may fit your needs. If you have a large downpayment, or more than 35% home equity available, a home equity line of credit (HELOC) can provide a low interest rate. The minimum monthly payments along with an open term allow you to pre-pay at any time without penalty.  If you’re looking for the flexibility of a HELOC but don’t’ have the minimum downpayment or equity required, a variable rate mortgage could be your solution. It’s a closed term, but still provides low payout penalties, flexible pre-payment and an interest rate and payment that are based on prime rate. If you want short term and payment stability simultaneously, you can always consider a 1-4 year fixed term. These are ideal if you have a more defined timeline though the downside to these types of rates is, again, that you need to qualify at a higher interest rate than the contract rate you’re actually receiving.

 

You should now have a general idea of what to expect when you’re rate shopping. I want to emphasize that rate is not everything.  Don’t overlook the payout penalties, pre-payment privileges or post-funding mortgage access. What I’m really saying is, there are other aspects to the mortgage process that are just as vital.   Ensure you have a detailed discussion about your specific financing needs, both current and future goals with your mortgage professional to ensure you’re aware of all the details of your mortgage approval before you commit to it.

If you’re looking for an experienced Mortgage Broker, call the MortgageGirl at 780.433.8412 or email info@mortgagegirl.ca. Or, stay in the loop by following us on Twitter @mortgagegirlca.

*Numbers based on $70,000 qualifying income with 5% downpayment, $500/monthly minimum debt payments, $3000/year property taxes, $100/month heating, 25 year amortization. 4-year qualifying rate of 4.64% yields max mortgage amount of $303,776, 5-year qualifying rate of 2.69% yields max mortgage amount of $372,371.

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3 thoughts on “It’s Not All About Rate

  1. Pingback: 8 Mortgage Secrets Everyone Should Know |

  2. Pingback: 8 Mortgage tidbits you might not know |

  3. Pingback: Should I renew my mortgage early? |

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