As a mortgage borrower – particularly if this is your
first time embarking upon homeownership – there’s no doubt you have a load of
questions related to the mortgage process. Aside from the most common
questions, such as those relating to mortgage rate, the maximum mortgage amount
you’ll be able to receive, as well as how much money you’ll need to provide for
a down payment, the following five questions and answers will help you dig a
little deeper into the mortgage financing process.
1. Can I make lump-sum or other prepayments on my
mortgage without being penalized? Most lenders enable lump-sum payments and
increased mortgage payments to a maximum amount per year. But, since each
lender and product is different, it’s important to check stipulations on
prepayments prior to signing your mortgage papers. Most “no frills” mortgage
products offering the lowest rates often do not allow for prepayments.
2. What mortgage term is best for me? Terms typically
range from six months up to 10 years. The first consideration when comparing
various mortgage terms is to understand that a longer term generally means a
higher corresponding interest rate and a shorter term generally means a lower
corresponding interest rate. While this generalization may lead you to believe
that a shorter term is always the preferred option, this isn’t always the case.
Sometimes there are other factors – either in the financial markets or in your
own life – you’ll also have to take into consideration. If paying your mortgage
each month places you close to the financial edge of your comfort zone, you may
want to opt for a longer mortgage term, such as five or 10 years, so that you
can ensure that you’ll be able to afford your mortgage payments should interest
rates increase.
3. Is my mortgage portable? Fixed-rate products usually
have a portability option. Lenders often use a “blended” system where your
current mortgage rate stays the same on the mortgage amount ported over to the
new property and the new balance is calculated using the current rate. With
variable-rate mortgages, however, porting is usually not available. This means
that when breaking your existing mortgage, you will face a penalty. This charge
may or may not be reimbursed with your new mortgage. Some lenders allow you to
port your mortgage, but your sale and purchase have to happen on the same day,
while others offer extended periods.
4. What amortization will work best for me? The lending
industry's benchmark amortization period is 25 years, and this is also the
standard used by lenders when discussing mortgage offers, as well as the basis
for mortgage calculators and payment tables. Shorter time-frames are also
available. The main reason to opt for a shorter amortization period is that
you'll become mortgage-free sooner. And since you're agreeing to pay off your
mortgage in a shorter period of time, the interest you pay over the life of the
mortgage is, therefore, greatly reduced. A shorter amortization also affords
the luxury of building up equity in your home sooner. While it pays to opt for
a shorter amortization period, other considerations must be made before
selecting your amortization. Because you're reducing the actual number of
mortgage payments you make to pay off your mortgage, your regular payments will
be higher. So if your income is irregular because you're paid commission or if
you're buying a home for the first time and will be carrying a large mortgage,
a shorter amortization period that increases your regular payment amount and
ties up your cash flow may not be your best option.
5. How do I ensure my credit score enables me to qualify
for the best possible rate? There are several things you can do to ensure your
credit remains in good standing. Following are five steps you can follow: 1)
Pay down credit cards. This is the #1 way to increase your credit score. 2)
Limit the use of credit cards. If there’s a balance at the end of the month,
this affects your score – credit formulas don’t take into account the fact that
you may have paid the balance off the next month. 3) Check credit limits.
Ensure everything’s up to date as old bills that have been paid can come back
to haunt you. 4) Keep old cards. Older credit is better credit. Use older cards
periodically and then pay them off. 5) Don’t let mistakes build up. Always dispute
any mistakes or situations that may harm your score by making the credit bureau
aware of each situation.
