Avoid These 5 Costly Mortgage Mistakes
With several mortgages behind him, you’d think Kelly Walters would know a thing or two about the process. He does.
That’s why, when he went to the bank recently for his purchase of a new family home, he had all his financial ducks in a row and everything the lender would need in a “nice neat package.”
“I know what the banks want to see,” says the steamfitter, who poses a lending challenge because his contract work doesn’t generate a regular pay cheque.
he 34-year-old father of two young boys learned by trial and error after buying several investment properties in the past 10 years.
“I’m getting pretty good now,” he says after finding a lender who would give him “high appraisal value” for the 90-hectare farm northeast of Cobourg where his family is moving this month. His advice? Do your homework and do it early!
The experts concur. First-timers, experienced buyers and home owners renewing their mortgage can all avoid making mistakes through preparation and informed advice, they say.
Mortgage specialists have identified the top bloopers people make again and again.
What you don’t know can hurt you: Above all, educate yourself, advises Carole Ann Bryant, a mortgage professional at Cobourg’s mortgagesthatwork.ca, who worked on Walters’ financing.
Mortgages are complex and you don’t want to just take whatever product or term the bank is pushing, she warns.
With all the information online and specialists who work for you, boning up before you buy isn’t difficult, she says. “Understand the product and what you’re getting into!”
Will the real reality check please stand up? The terms pre-qualification and pre-approval are often confused even within the industry. But whatever you call it, a casual run-through of your finances — what Toronto mortgage broker Joe Walsh calls “number-crunching spat out by a computer” — is no guarantee that you actually qualify for the loan you’re seeking.
It’s a good idea, he urges, to go through the full process to get the “real deal” on what you can afford based on your circumstances.
You should actually apply for a loan before you buy a home, by submitting tax returns, pay stubs and other data, adds Jaspal Cheema, a Brampton realtor and licensed mortgage specialist. The lender verifies the information, checks your credit and if all goes well, “agrees, in writing, to make the loan,” he says, adding that that certainty gives you more negotiating clout with the seller.
It’s not just the rate: Getting hooked on a mortgage based just on the lowest interest rate could lead to regret, says Walsh, who urges borrowers to look at other factors, such as pre-payment options and penalties, if you want to pay it off early.
“When you decide on the basis of pricing alone, it might not be the best product for you,” he says.
When you do find the rate you want, get the company to guarantee in writing how long they’ll hold it, suggests Cheema, who includes that advice in a list of 11 “big” mortgage mistakes on his website.
Budget and plan: Without a budget and a plan, home buyers won’t have a clear picture of their financial needs, cautions CaroleAnn Bryant. Maybe you can afford a house now when interest rates are low, but beware the future, she says.
Today’s five-year mortgage for 3.29 per cent could be 5.29 per cent at renewal time, Bryant says.
“You have to assume (rates) are going up and you don’t want to be in a position where you can’t afford your mortgage payments.”
She advises drawing up a budget that allows for home repairs and maintenance, and writing a long-term plan that covers such things as starting a family or putting older kids through school.
Shop around: When renewal time rolls around, it’s tempting to sign up for your current lender’s first offer, says Bryant. But “chances are,” you could save anywhere from a quarter to a full percentage point by shopping around. On a $200,000 mortgage with a 20-year amortization, a rate that’s 0.25 per cent higher would cost $4,000 more in interest over five years, she points out.
Check out interest rates online or negotiate with your bank, Bryant advises. If you decide to switch to another lender, make sure you don’t have a collateral mortgage that carries a transfer fee, she adds.
Remember, adds Cheema, “The banks are not going to save you a single penny, because your saving is their loss.”
Dos and don’ts
The professionals offer dos and don’ts that could save you money and stress:
• Do get your credit report and score months before you apply for a mortgage so you can fix anything that might affect your loan approval!
• Don’t put any big-ticket items on your credit cards between acceptance of your home purchase offer and closing because it could affect your final mortgage approval!
• Do set aside enough cash for closing — at least 2 per cent of the price of the home — and for costs after you move!
• Don’t extend your amortization to 25 years or 30 years to lower your payments! In the long run, it will cost you more than a 20-year amortization.
• Do opt for bi-weekly, not monthly, payments to accelerate the pace of paying down your mortgage!