For most, obtaining a mortgage is the only means of achieving homeownership. However, mortgages involve more than seeing a house you like, going to your bank, borrowing the money, and buying the house. Obtaining a mortgage consists of a process that must be followed and understood.
A mortgage is the biggest debt most of us will ever carry, and a home is the most expensive purchase we will ever make. Misunderstanding a mortgage clause could lead to losing out on buying the home of your dreams, or you may sign up for a mortgage that you can’t actually afford. While working with a mortgage broker will help you avoid these expensive errors, if you’re applying for a mortgage by yourself, knowing what to avoid will benefit your cause.
If you’re in the process of buying a home and are trying to obtain a mortgage or refinance an existing mortgage, here’s a list of the most common mortgage mistakes people make and solutions to avoiding them.
1. Referring Only to the Bank When Applying for a Mortgage.
Purchasers often make this mistake assuming that because they are an “existing customer”, their bank will offer them a really good rate and product. However, one should always consider that there are many more options than just their current bank. In fact, there are well over thirty lenders in British Columbia where a client can turn to, to find a mortgage. Not all lenders will have better rates or products, but it is almost a guarantee that one or more lenders have something better than what the client’s bank is offering. The difference in rate and product could save the client thousands and enable them to pay off their mortgage much sooner.
2. Looking Solely at Rate When Seeking a Mortgage.
This is one of the most common mistakes because often the mentality is that “a lower rate = saving money.” In many cases this is not true, one should consider that there are many mortgage products available. Some of which can be tailored to help save money, pay down principal faster, provide attached secured Line of Credits, etc. Additionally, it is also important to know that many mortgages with the lowest rates actually have various restrictions that can be costly. For example, no portability, low or no pre-payment privileges, higher penalties, etc. To ensure a client is getting the best mortgage rate and product it is always best to consult a mortgage broker.
3. Not Reading APR Prior to Signing the Commitment.
While mortgage documents can be difficult to read, it is advised that one always reviews the APR before signing. The APR or Annual Percentage Rate is the cost of borrowing, expressed as a rate. In some cases, this will be lower than the rate advertised, and in others, it might be higher. If it is higher, it is because the lender has advertised a low rate, but between fees and other costs that low rate is not a true representation of what the customer is actually receiving. If the APR is lower than what is advertised this usually is a good thing. However, some lenders may offer items such as a ‘cashback’ to drive the APR down. In almost all cases this ‘cashback’ amount will be repayable upon deciding to break the mortgage term or when moving it to another institution early.
This in addition to any penalties make it very difficult to move away from the lender in the future.
4. Misunderstanding Qualification vs Affordability.
Another common mistake is not understanding the costs associated with purchasing a home and the running costs associated with owning a home. This mistake is made because the conversation with a bank representative often ends upon being told the maximum approval amount.
There are several costs associated with a purchase apart from the ‘purchase price’ and the ‘down payment’. These costs include home inspection, lawyer and notary fees, appraisal (in most cases), property transfer tax (exemptions apply to first time home buyers (purchasing <$550,000), or anyone purchasing a newly built home <$750K). There are also other running costs to consider such as strata/maintenance fees, property taxes, hydro, etc.
A mortgage broker will advise on all these costs to ensure the purchase fits the client’s budget, and will also help the clients prepare for the entire process of purchasing a home.
5. Not Getting Pre-Approved/Rate-Held.
Many purchasers ignore the process of getting pre-approved for a mortgage. This also applies to homeowners considering refinancing to pay for renovations, consolidating debt, or making a large capital purchase using their equity. In our present market, we have seen rates rise a handful of times over the past year. When considering a purchase or doing something with a current mortgage, it is always best to contact a mortgage broker right away.
A mortgage broker can rate-hold a file to ensure his/her client receives today’s best rates tomorrow or up to 120 days. A higher rate means a larger mortgage payment, and a larger remaining principal balance at the end of the mortgage term. Usually, a bump in rate is 0.10% to 0.25% which can be very significant when amortized over the term of a mortgage.
To avoid these and other mistakes, reach out to Keegan Casidy at The Mortgage Group. As an independent mortgage broker in North Vancouver, BC, I work with over forty mortgage lenders in British Columbia to provide you with the best mortgage options based on your mortgage needs. Whether you are a first-time home buyer or property investment mogul, I will help you get the most competitive mortgage rates and products in the market. For a complete list of services I provide, please click here. If you have any questions about mortgages, I’d love to hear from you. Please contact me here.