Busted! Don’t Believe These Myths About Mortgage Brokers!
Attempting to obtain a mortgage can create deep anxiety due to the sheer size of the amount of money to be borrowed and the complexity of the paperwork involved. Besides, sieving through the numerous mortgage products, weighing the pros and cons and subsequently submitting a duly filled application, can be quite a task.
To alleviate the burden of looking for a mortgage by yourself, mortgage brokers or agents specialize in narrowing down your options, and explaining how each product can benefit you. They also help in completing all the required documentation. Sadly, there has been a perpetuation of misconceptions about the role of a mortgage broker and how they help.
This misinformation often clouds the judgment of mortgage seekers, and they opt to make one of the most important decisions in life without professional help. To help you distinguish between fact and fiction and take advantage of their professional skills, Taufeeq Rahim & Victor Sodia has debunked some of the most widely believed myths about mortgage brokers.
Myth 1: Mortgage brokers and agents charge fees.
Some people are not sure how agents are compensated and believe they charge high fees. Unfortunately, this is one of the most widely believed myths because, in reality, lenders pay the mortgage agents, which makes their services free for you. There are times when mortgage brokers or agents charge a fee, but that usually happens when the lender believes that the mortgage applicant is a high-risk case due to past credit issues. At times like these, depending on the lender and risk involved, there may be agent fees as the lender does not compensate the agent directly.
Myth 2: Mortgage brokers and agents are paid more for charging higher interest rates.
This isn’t true. Whether the interest rate is higher or lower, the agent gets compensated only a small percentage on the dollar amount of the mortgage. Moreover, a mortgage broker is duty bound to secure not only the best rate but also the best overall mortgage option for the client.
Myth 3: Lowest interest rate equals the best mortgage.
One of the problems in the industry is the mortgage advertisements, which make people believe that the lowest interest rate loan equals the best mortgage. An advert may promote an interest rate of 1.9%, and the chances are high that home-buyers will check it out. What many don’t realize is that the lowest interest rate is only part of the story. For example, on a $500,000 mortgage, a discount of 0.10% lower does not even equate to a saving of $500 a year. The right mortgage, however, can save you much more than that.
Saving the actual cost of borrowing is the key to pounding down your debt and building your wealth. Though rates are essential, the real savings result from the little things you don’t see in an advertisement, like finding the right combination of options, privileges and payment schedules to maximize your savings. For example, drop a few hundred dollars against your mortgage principal once in a while, and you could save thousands in interest and shave years off your mortgage. That’s because if you knock down the principal even a little, every dollar you pay after that will go further.
Mortgage contracts are full of devilish details that make winners and losers of Canadian home buyers. Rates are just the bait and generally, the lower the rate, the bigger the catch. Often it’s not what is in the mortgage contract that restricts you, but what is not on the contract. As they say, the devil is in the detail you see or do not see!
Now that we have busted these myths, here are some factors that you should consider while determining a suitable mortgage option.
The term - While most people think five years is the best, more savings can be had by going with a shorter term, provided your situation allows you to refinance when the mortgage matures.
Amortization - While you may pay a premium to extend the amortization, it can help drive your monthly obligation down.
Location of the property - That is correct, not all lenders will cough up the money for some adverse location just because you have a AAA credit and are financially sound.
Type of property - If it is a high rise condo, this may have an effect.
Rate-hold - Many lenders will charge a premium for a more extended rate hold than a shorter period.
Prepayment restrictions - If you plan to make extra payments during the term of your mortgage, the lowest rate may not be an option, as they usually come with shackles that do not allow prepayment and many other options.
Portability Option - The average mortgage in Canada is about 3.5 years, so if you move to a new home, and you wish to keep the same mortgage, the lowest mortgage may not have that option. Therefore, you will end up paying the penalty when breaking the existing lease, and then getting a new one.
Refinance Option - A refinance option will allow you the freedom to refinance before maturity, and yes you will pay a bit more for this privilege.
High penalty - If you break the mortgage before maturity, a major bank, as well as some other lenders, will charge you a high penalty, often amounting to many thousands. The Interest Rate Differential (I.R.D) calculation is different with each lender.
Here are some essential questions you should ask yourself before starting the mortgage process.
Is the mortgage for your primary, rental or second property? Just because you saw an amazingly low rate on the web does not mean the lenders will give that to you. The property and its use play a vital role in determining mortgage rates as well.
Can you prove your income? Salaried, employed with the same company for many years, not stable income source, or self-employed.
How are you credit-wise? It is not only your beacon score but also the number of credit lines, utilization, and length of history that make up your credit profile, which has a significant impact on getting approved.
How big is the Mortgage vs. your Property value? The rate you secure can be significantly affected.
Is the down-payment your own, or any portion was a gift from family? This can change the application itself and everything with it.
Can you pass the stress test? If not, then you will have to curtail your expectations.
Is it a purchase, refinance or switch? If your mortgage is a purchase, refinance, or just switching between lenders this can affect the rate.
These key mortgage features don’t fit in a rate ad, and this is where the rubber hits the road in building the right mortgage. I often think of the lowest rate mortgage to something like a car. If cheapest were the only way to go, then we would all be driving Ladas, and there would be no need for any other manufacturers. The more comfort, luxury, safety, and quality we want, the more we pay as well. A Lada may be just the right car for someone who needs only a vehicle to get from A to B. Similarly when searching for the right mortgage, while the lowest rate may work for some, it’s not for everyone. You have to find the one that fits your needs, lifestyle, and then get the best rate for the program which you qualify. There is a mortgage program and accompanying rate for everyone, take the time to find out the one that is for you.
If you’re looking to pole vault over these myths and secure your desired mortgage, reach out to Taufeeq Rahim & Victor Sodia. As a leading mortgage broker, in Milton, Ontario, we specialize in providing the best mortgage options for our clients. Our services include refinance, reverse mortgage, and debt consolidation and we will walk you through the pre-qualifying, pre-approval, approval, and final stage. Our mortgage agents serve clients across Milton, Georgetown, Guelph, Hamilton, Burlington, Kitchener, Cambridge, Brampton, Mississauga, and Oakville, Ontario.