Mortgage Shopping – What to Consider

Mortgage Shopping – What to Consider

By Martin Rumack

April 26, 2016

25-year amortization, mortgage, mortgage shopping, re-financing, Toronto Realestate

mortage

If you are in the market for a mortgage (whether new purchase or re-financing), and whether the home is new or old, residential, recreational, investment, retail, commercial, or industrial – there are various factors to consider in deciding which financial institution or private lender you should deal with.
What are the factors to take into consideration? They are:
• The type of mortgage (closed, fully open, or partially open);
• The interest rate; a fixed rate, or variable rate;
• The term of the mortgage; and
• The amortization period of the mortgage (which is the time it would take you to pay off your mortgage based on a certain payment amount for a certain number of years).
As an example of the last point: a 25-year amortization means if you paid a specific payment amount on account of principal and interest, had a 25-year fixed interest rate and you make no extra payments, the mortgage would be paid off at the end of 25 years.
Some of the other factors to consider relate to the penalty for paying off the mortgage earlier than the end of the original term of the mortgage. In other words, what is the cost to you for paying off the mortgage before the maturity date?
The standard penalty is usually based on the greater of: 3 months’ interest on the balance being paid out before maturity, or the interest rate differential. The interest rate differential is calculated on the difference between the interest rate you are paying for your mortgage and the then current rate being charged for this type of mortgage product at the time you wish to make a partial payment or discharge the mortgage completely.
Ideally, there will be provision for pre-payment that does not incur a penalty; this allows you to prepay a certain percentage of the original principal owed of the mortgage annually. The mortgage may also be assumable or portable, which gives you the most flexibility as borrower.
Finally, another key consideration is the nature of the terms and conditions dealing with mortgage renewal at the end of the term, or renegotiating the mortgage terms and/or an increase in principal during the term of the mortgage.
Ultimately, you must make sure that you completely understand what you are committing to and the costs involved.
If you are in the market for a mortgage (whether new purchase or re-financing), and whether the home is new or old, residential, recreational, investment, retail, commercial, or industrial – there are various factors to consider in deciding which financial institution or private lender you should deal with.
What are the factors to take into consideration? They are:
• The type of mortgage (closed, fully open, or partially open);
• The interest rate; a fixed rate, or variable rate;
• The term of the mortgage; and
• The amortization period of the mortgage (which is the time it would take you to pay off your mortgage based on a certain payment amount for a certain number of years).
As an example of the last point: a 25-year amortization means if you paid a specific payment amount on account of principal and interest, had a 25-year fixed interest rate and you make no extra payments, the mortgage would be paid off at the end of 25 years.
Some of the other factors to consider relate to the penalty for paying off the mortgage earlier than the end of the original term of the mortgage. In other words, what is the cost to you for paying off the mortgage before the maturity date?
The standard penalty is usually based on the greater of: 3 months’ interest on the balance being paid out before maturity, or the interest rate differential. The interest rate differential is calculated on the difference between the interest rate you are paying for your mortgage and the then current rate being charged for this type of mortgage product at the time you wish to make a partial payment or discharge the mortgage completely.
Ideally, there will be provision for pre-payment that does not incur a penalty; this allows you to prepay a certain percentage of the original principal owed of the mortgage annually. The mortgage may also be assumable or portable, which gives you the most flexibility as borrower.
Finally, another key consideration is the nature of the terms and conditions dealing with mortgage renewal at the end of the term, or renegotiating the mortgage terms and/or an increase in principal during the term of the mortgage.
Ultimately, you must make sure that you completely understand what you are committing to and the costs involved.

 

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