First-time homebuyers have plenty on their minds between searching for the perfect house and securing a mortgage. While hunting for a home itself can be emotionally straining, the mortgage process doesn’t need to be. Here are three traps to avoid that will help ease the transition into home ownership.
Trap #1: Going with the bank’s posted rate
When applying for a mortgage, potential homeowners tend to default to their financial institution out of familiarity. Doing so, however, could mean you won’t get the best mortgage rate. Avoid accepting the bank’s offer because it’s worth shopping around for a better rate.
Other lenders, including trust companies and credit unions, can offer lower rates and comparable service to any of the big banks. These lenders will often provide a discount, which even at a fraction of a percentage point, can result in significant interest payment savings over the life of the mortgage.
Mortgage comparison sites, such as Ratehub.ca, provide a valuable service by consolidating rates from a variety of brokers. Mortgage brokers negotiate with lenders on their client’s behalf for the lowest rates and offer their service for free. Brokers work in their client’s best interest as they are paid a finder’s fee by the lender. A broker can find the right deal that best meets a specific set of circumstances.
Trap #2: Picking the lowest rate without reading the fine print
A low interest rate can save thousands of dollars, but it’s also important to understand the terms of the mortgage agreement. Avoid settling on the lowest mortgage rate without a firm grasp on the prepayment options or penalties that could end up costing more than a slightly higher rate.
Prepayment options can help homebuyers to pay off the mortgage faster. Some lenders will allow lump-sum prepayments of up to 25% of the original principal every year. Throughout the term, lenders may also allow borrowers to increase regular payments by a fixed percentage of the original payment amount each year. These increases are applied directly against the principal and can take years off the amortization period. Some “no frills” mortgages don’t have these options.
Penalties apply when borrowers break their mortgage term early. Whether it’s to refinance, switch mortgages or sell the home, these fees are tricky to calculate and can often cost thousands of dollars. Use Ratehub’s mortgage penalty calculator for an idea of the potential fees when weighing specific scenarios.
Trap #3: Bundled home insurance
Home insurance is one of many extra costs to consider when purchasing a new home. In addition to mortgages, financial institutions will sometimes recommend their products for coverage. While it may be convenient to go through the mortgage provider, avoid bundling the home insurance coverage as it may not result in the best value.
Home insurance isn’t a condition of a mortgage loan. There are no obligations to accept any such offers and declining coverage doesn’t have a negative impact on the mortgage application. Home insurance rates vary so shop around for a better rate.
The last word
The decision to take on a mortgage should be made with careful consideration of its terms and conditions. Shop around for the best rate, understand the agreement’s fine print, and don’t fall victim to an upsell. Avoiding these traps will ensure thousands of dollars in savings and a mortgage that’s paid off sooner rather than later.
- How Mortgage Rates Can Vary by Bank Branch
- Avoid These 4 Common First-Time Homebuyer Mistakes
- What is the Home Buyers’ Plan and How Does It Work?
- How Prepaying Your Mortgage Will Help You Become Debt-free Sooner
Flickr: Clarice Barbato-Dunn