There is a lot of information to absorb when you obtain a mortgage, which makes first time home buyers particularly susceptible to some of the hocus pocus that exists in the mortgage market.
Like anything, a mortgage deal that sounds too good to be true usually is. Here’s a look at some commonly used traps:
Quick close mortgages
You might be attracted by a lender’s extremely low mortgage rate, but beware the deal if it comes with a “quick close” condition. Quick close mortgages generally close within 30 days, which may or may not be a problem for you, depending on how your search for a home goes after getting approval. Another trademark of quick close mortgages is that they are typically five-year fixed loans and there is no way of refinancing for the duration of that term.
There are some great deals on five, seven or even 10-year fixed mortgages, but if you have to break your mortgage for any reason (for instance, divorce, illness, or job relocation) then you’ll have to pay three months interest or the interest rate differential – whichever is the higher amount. An IRD is a penalty for breaking the mortgage and is calculated as the difference between the existing rate and the rate for the term remaining, multiplied by the principal outstanding and the balance of the term. The three factors that determine your IRD are the amount of prepayment, the length of the remaining term and the current interest rate associated with the remaining term. Most closed fixed-rate mortgages have a penalty that is higher than three months interest.
A closed fixed rate mortgage may be a good option for you, but the important thing is to take an honest look at your situation prior to obtaining a mortgage and work out what your potential IRD costs could be should you need to break the contract and if you could financially sustain that cost.
No closing costs
“No closing costs” is usually a red flag that something is not on the up and up with this offer. If there’s one thing you can expect when you get a mortgage is fees – lots of them. The CMHC website (http://www.schl.ca) has a complete list of costs you can expect to pay when obtaining a mortgage.
There is absolutely no substitute for getting advice from a mortgage professional – whether that be from a trusted banker or a mortgage broker.
How to find a qualified broker:
- Watch for accreditation, such as AMP (Accredited Mortgage Professional) status and membership in national organizations such as CAAMP
- Check with your local Chamber of Commerce
- Do your research. Find out how long they’ve been in the business and what lenders they have built relationships with
- Check a broker’s references, including bank references
- Talk to family and friends about their experiences with brokers
- Look at their awards/industry recognition history