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There is a lot to know when it comes to buying a home. I remember when my husband and I first started talking seriously about it over two years ago. I spent months researching online, reading real estate books, and of course, checking out blogs from people who went through the process themselves.
Now that I’m officially a homeowner, one of the things I wish I looked into a bit more was mortgages. Sure, everyone knows you need a mortgage to buy a home, but there are so many intricacies involved in finding the right mortgage for you, I want to make sure you are fully in the loop!
To break things down so you can easily check them off on your house hunting checklist, here are the 10 most important questions you need to answer before getting a mortgage. Once you’ve successfully answered every question, then you are ready to get yourself a mortgage!
1. Are You Getting a Conventional or High-Ratio Mortgage?
This is something you can probably answer fairly easily once you’ve figured out your budget. To put it simply, a conventional mortgage is one in which you put 20% or more towards your down payment. That’s the type of mortgage my husband and I got because we really wanted to keep our payments low and we wanted to avoid paying mortgage insurance.
If you’re unable to put 20% or more down, then you’d be getting a high-ratio mortgage. It’s called high-ratio because they are considered riskier than conventional mortgages and because the mortgage will account for more than 80% of the purchase price. And if you do get a high-ratio mortgage, you will be required to get mortgage insurance.
And just so you know, insurance premiums depend on how much you put down. The key thing to remember is the more you put down, the lower your premiums will be.
2. Do You Want an Open or Closed Mortgage?
An open mortgage allows you to add extra contributions to your mortgage on top of your regular payments. So if you get a surprise windfall or save up some extra cash, you’d be allowed to throw it onto your mortgage without having to pay a penalty.
In turn, a closed mortgage doesn’t allow this, unless you’re okay paying a penalty (and I’m gonna guess you’re not). So why would anyone get a closed mortgage? Well, they usually have lower interest rates associated with them, which could make your regular payments more affordable if you’ve got a big mortgage.
3. Do You Want a Fixed, Variable, or Convertible Rate Mortgage?
This is an important one, so pay attention. A fixed mortgage means your interest rate will stay the same throughout your term. It’s a good option if you want your payments to be consistent, and this just might be easier to integrate into your budget.
However, a variable rate, which fluctuates based on market conditions, can mean you’ll be paying a lower interest rate than a fixed rate. Then again, if the market doesn’t continue to be so low and starts to climb, so will the interest on your mortgage.
A convertible rate is a mix of both. It starts out as a variable rate, but you get the option to lock it into a fixed rate at specified times.
4. Are You Going to Get Your Property Taxes Rolled into Your Mortgage?
When my husband and I first started talking to family about buying a place of our own, one thing I learned from my parents was that you could roll your property taxes into your mortgage.
The benefit of this is that you’ll never forget to pay it (or save up for it), so there’s definitely some peace of mind there. The downside is it might cost you more than just paying your municipality directly.
Also, some lenders require you to roll your property taxes into your mortgage, so this might require some extra research on your end to find out if the convenience factor outweighs saving some money every year.
5. What Amortization Period Do You Want?
Your mortgage amortization period just means how many years it will take you to pay off your mortgage. The most common amortization period is 25 years, however, you can choose a shorter period of time to pay off your mortgage quicker. A shorter amortization period also means you’ll be paying less interest in the long run.
6. How Long Do You Want Your Term to Be?
Your mortgage term is how long your agreement and interest rate are with your lender. A common term is 5 years, but you can also do a 1-year or 3-year term. Once your term is up, you are free to renew or renegotiate your mortgage with your lender, or you could shop around for a new lender.
7. What Payment Schedule Do You Want to Be On?
These are the different mortgage payment schedules you can choose to be on: monthly, semi-monthly, biweekly, or weekly. You may want to choose a payment schedule that matches when you get your paycheque, however that may not be the most cost-effective choice.
If you choose biweekly payments, you’ll end up paying your mortgage faster than if you were to do semi-monthly payments. Because there are a few extra payments involved with biweekly payments compared to semi-monthly, this is a simple way to cut your 25-year mortgage down to 21 years.
8. Do You Pass the Stress Test?
As of Oct. 17, 2016, you need to pass a stress test to be approved for a mortgage. These rules were put in place to protect buyers from buying more houses than they can really afford. So what is the stress test? It’s seeing if you can still afford your mortgage if it goes up to whatever the Bank of Canada 5-year rate is at the time.
This was actually something my husband and I did before these rules kicked in. We wanted to make sure if interest rates go up, which they will eventually, that we could still afford to carry our mortgage. This also helped us figure out our housing budget, which was a big reason we decided against buying a house and opted to buy a townhouse instead.
9. How Are You Going to Get Your Mortgage?
There are basically two ways you can get a mortgage: go directly to a lender like a bank, or hire a mortgage broker. My husband and I went with a mortgage broker for our home purchase because it just made sense to us.
The first reason was that we didn’t have to pay to use a mortgage broker. Brokers are compensated by the financial institutions they broker mortgages for, not the buyers. That being said, some brokers do charge buyers a fee, so make sure to ask if this is the case before doing business with a broker.
The second reason was that their job is to find the best rate possible for you without significantly impacting your credit score. You see, if you were to shop for a mortgage yourself, every time the bank would check your credit, your credit score would get dinged. Since a broker only checks your credit once, it would only ding your score once. And why does that matter? Well, you want your credit score to be as high as possible so you can qualify for a low-interest rate.
10. Are You Ready for this Big Responsibility?
This is all a lot to take in I know, so the last question you need to be confident in answering is if you are really ready. As I’ve learned after becoming a homeowner myself, owning a home is a big deal. It’s expensive, it’s a lot of responsibility, and it means you may be on the hook to pay off hundreds of thousands of dollars for the next 25 years.
If that doesn’t scare you off and you’re ready for this challenge, then go for it!
To learn more about mortgages and mortgage brokers, visit the Financial Services Commission of Ontario’s new website.
I would love to know some of your answers to these questions, so make sure to leave them in the comments!
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