5 Questions Mortgage Borrowers Should Ask Before They Borrow
It might be the first time you are getting a mortgage and may have a lot of questions that just aren’t getting answered through your Google search. You may also be too afraid of asking them for fear of looking ill-prepared for the biggest purchase you’ll probably ever make for yourself. However, no question is too simple, too complex or too silly! Better you known now, rather than finding out later, which could cost you money.
Here are some frequently asked questions I often receive as a broker, which I’m happy to answer in the Q&A below.
Q1) How do I ensure my credit score qualifies me for the best possible mortgage rate?
There are several things you can do to ensure your credit remains in good standing.
- Pay down credit cards. The number one way to increase your credit score is to pay down your credit cards so they’re below 70% of your limits. Revolving credit like credit cards seems to have a more significant impact on credit scores than car loans, lines of credit, and so on.
- Limit the use of credit cards. Racking up a large amount and then paying it off in monthly instalments can hurt your credit score. 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.
- Pay off or down balances before your statement periods close. If your lender is slower at reporting monthly transactions, this can have a significant impact on how other lenders view your file. Since some financial institutions don’t report your maximum limits, the credit bureau is left to only use the balance that’s on hand making it appear that you’re regularly maxing out your cards. The best bet is to pay your balances down or off before your statement periods close, to avoid any tardy reporting issues reflect badly on your credit score.
- Keep old cards. Older credit is better credit. If you stop using older credit cards, the issuers may stop updating your accounts. As such, the cards can lose their weight in the credit formula and, therefore, may not be as valuable – even though you have had the cards for a long time. Use these cards periodically and then pay them off.
- Don’t let mistakes build up. Always dispute any mistakes or situations that may harm your score. If, for instance, a cell phone bill is incorrect and the company will not amend it, you can dispute it by making the credit bureau aware of the situation.
Q2) What amortization will work best for me?
The standard lending industry’s benchmark amortization period is 25 years and used by lenders when discussing mortgage offers. This is usually the basis for mortgage calculators and payment tables but keep in mind that shorter or longer timeframes are available – to a maximum of 30 years.
If you choose a shorter amortization period, you’ll become mortgage-free sooner. Since you’re paying off your mortgage over a shorter period of time, the interest you pay over the life of the mortgage is, therefore, greatly reduced. A shorter amortization also affords you the luxury of building up equity in your home sooner. Equity is the difference between any outstanding mortgage on your home and its market value.
While it pays to opt for a shorter amortization period over the long term, 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, self-employed 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 the best option for you.
Q3) Since I already have mortgage default insurance, do I still need mortgage life insurance?
Yes. Mortgage default insurance and mortgage life insurance are different.
Mortgage life insurance is an insurance policy on you, as a homeowner. This insurance allows your family or dependents to pay off the mortgage on the home should something tragic happen to you. This type of insurance is meant to protect the family of the homeowner, not the mortgage lender.
Mortgage default insurance, on the other hand, protects the lender. This insurance is required by lending institutions to help cover their assets – only if you have less than a 20% down payment.Q4) What can I do to maximize my mortgage payments and own my home sooner?
Paying down your mortgage sooner could save you thousands of dollars in interest payments throughout the term of your mortgage.
Most mortgage products, for instance, allow for prepayment privileges where you can pay up to 20% of the principal (the true value of your mortgage minus the interest payments) per calendar year. This will also help reduce your amortization period (the length of your mortgage).
Another way to help pay off your mortgage sooner is by making accelerated bi-weekly mortgage payments, which adds up to making one additional monthly payment per year. (This shouldn’t be confused with semi-monthly mortgage payments which makes 24 payments per year.) Accelerated bi-weekly mortgage payments (26 payments per year) will not only pay your mortgage off quicker, but will also save you a significant amount of money over the long term.
In addition to increased payment options, most lenders allow you to make lump-sum payments on your mortgage (as much as 20% of the original borrowed amount each year). Some lenders will only let you make these lump-sum payments on the anniversary date of your mortgage while others will allow you to spread out the lump-sum payments to the maximum allowable yearly amount. Inquire with your broker on what options are available for you.
Q5) At the end of my term, how do I get the best mortgage product and rate upon renewal?
The best way to ensure you receive the best mortgage product and rate at renewal is to enlist your mortgage broker once again to get the lenders competing for your business just like they did when you negotiated your last mortgage. A lot can change over a single mortgage term, and you can miss out on a lot of savings and options if you simply sign a renewal with your existing lender without consulting your mortgage broker.
If you have additional questions for me, please share them in the comments section below and I would be happy to respond.