Mortgages are just one of many stressful things to take into account when buying a home. The toughest things to deal with are the high costs associated with getting a mortgage and the long-term commitment that comes with signing the dotted line.
Getting the best rate – First and foremost, you want to secure a good rate. To do this, you need to shop around and do your homework. You wouldn’t pick the first used car you see, pay the dealer and drive off, would you? So why go with the first mortgage offer? You don’t need to stick with one financial institution just because you’ve been banking there your entire life. Go with the lender that offers you the best interest rate and a mortgage solution that works for you.
Remember that down the road when it comes time to renew your mortgage, you are essentially starting from scratch with the opportunity to research and find an even better deal. This process also comes with the ability to save money. Your bank will likely send you a letter in the mail that tells you to sign and return it to continue with your current mortgage plan. Many people follow their lead and sign because of the convenience, but if you’re able to secure a lower interest rate elsewhere, why wouldn’t you take the time to shop around?
Credit scores are like report cards for your banking history – Now is the time to be on your best behavior. Make sure you remember to settle up all of your outstanding payments; this even includes your credit cards at big box retailers or department stores. Small amounts that don’t seem like they matter can have huge consequences if you don’t take care of them before applying for a mortgage.
Borrow as little as you can – You can do this easily by maximizing your down payment. The more money you have to put down means a lower loan amount and potentially a lower interest rate. Ideally, you should be prepared to put 20% of the purchase price of the home down. However, 10-15% will still have a positive impact.
While we’re on the subject, you should know that the minimum amount you’ll need to secure a down payment is 5% of the purchase price of the home. The kicker is that with any down payment under 20%, you’ll only be able to qualify for a high-ratio mortgage because your loan value is more than 80% of the purchase price of your home. In this case, mortgage lenders will require you to get mortgage loan insurance – an added cost that varies depending on the size of your down payment and typically ranges from 0.5% to 3%.
It all adds up – An easy option would be increasing your payment frequency. If you can switch from making monthly payments to accelerated bi-weekly payments, you’ll pay your mortgage off sooner and end up saving money in the long run. For example, if your monthly payment is $1,200, after one year you would have paid: $14,400. Making bi weekly payments of $600, you would end up paying $15,600. That’s an extra $1,200 and you likely won’t notice the difference.
The R Word – Refinancing your mortgage is an effective way to save money if the opportunity to secure a lower interest rate comes up. Be aware: you will incur a penalty for refinancing your mortgage – typically three months interest. There may be other penalties associated with refinancing, so it’s important to ask for a “payout summary” which outlines exactly what you will need to pay. This summary could stop you from making the wrong decision.
Once you have completed the refinancing, you have two options. You can keep the amortization period you had on your previous mortgage and make lower monthly payments or you can continue to make the same monthly payments, which will allow you to pay off your mortgage in a lot less time and allow you to own your home outright sooner.
For more tips on buying a home, you can check out our Home Buyer’s Guide.