5 COMMON MORTGAGE MISTAKES MADE BY FIRST-TIME HOMEBUYERS findependencehub.com
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Mistake #1: Skipping the Mortgage Preapproval It’s hard to go house hunting if you don’t know how much you can afford to spend on a property. A mortgage preapproval helps you come up with a budget for the property you’d eventually like to buy. By providing your mortgage broker with some basic personal and financial information, such as your income, employment history and how much you’ve saved up towards a down payment, they’ll be able to take that information to the lender and get a mortgage preapproval. A mortgage preapproval tells you the maximum amount you can spend on a home. It also usually comes with a rate hold. You’re typically guaranteed a mortgage rate for between 90 and 120 days. If rates go up during this time, you’re guaranteed the lower rate. If rates go down, you get the lower rate. It’s a win-win situation for homebuyers.
Mistake #2: Shopping based solely on the Mortgage with the lowest rate Many first-time homebuyers are fixated on getting the lowest mortgage rate: too fixated. They use mortgage rate comparison websites to find the mortgage rate with the lowest rate, yet forget to consider other, more important factors. As I write in this post, the mortgage with the lowest rate may not be the best mortgage for you: quite often it’s not. It’s important to consider what I like to call the “3 mortgage P’s” – penalties, prepayments and portability. Of course, there are other factors to consider, such as fixed versus variable and standard versus collateral charges. Mortgage brokers know mortgages like the back of their hand since that’s all they deal with. A mortgage broker can help identify the factors that matter most to you and choose the mortgage that’s the best fit.
Mistake #3: Not considering other options besides the 5-Year Fixed Rate Mortgage As Canadians we are very risk averse. The media probably has something to do with it. On a daily basis we’re bombarded with new headlines designed to cause us to worry about our finances. If it’s not an article about an impending housing bubble, it’s an article about the possibility of higher interest rates or a survey that finds Canadian households would be stretched financially if interest rates were to go up (and for the record, a 100 per cent increase in interest rates only equals a 30 per cent increase in your mortgage payment). The fear mongering by the media has many first-time homebuyers going with five-year fixed rate mortgages. While there’s nothing wrong with this mortgage, it’s important to consider other mortgage options. You wouldn’t buy the first house you see when house hunting, so it’s important to look at other mortgage products. Your mortgage broker can help crunch the numbers and see if a variable rate mortgage or a shorter term fixed rate mortgage (1 to 4 years) would make sense.
Mistake #4: Not considering Mortgage Penalties When you sign up for a mortgage, probably the last thing on your mind is breaking it. Yet 6 out of 10 Canadians with a fixed-rate mortgage will break it at an average of 38 months in. If you asked those same homebuyers if there was any chance they’d break their mortgage when they first sign up, 10 out of 10 would likely say no. There can be many reasons that you break your mortgage: job loss, illness, job relocation, divorce … and the list goes on.
Mistake #5: Only shopping at your local bank branch There’s nothing wrong with going to your local bank branch first to shop for a mortgage. Just make sure it’s not your only stop. Shopping for a mortgage on your own can be a lot of work. You have to set up appointments during “banker hours” and fill in mortgage applications, on top of all your other daily errands. This is time consuming and applying at too many lenders can lower your credit score. There’s has to be a better way, and thankfully there is.