Choosing the Right Mortgage
Over the years, the types
of mortgages available to consumers
have increased dramatically. Competition
among lenders has led to marketing
campaigns that promote many different
types of options. Generally speaking,
once you are able to cut through
all of the fluff, you'll have
a much easier time making the right
decision for your situation.
So, in other words, stick to the
basics when shopping around and
you'll be able to keep things
straight. Here are those basics:
Cost
This is the single biggest issue
surrounding a mortgage. Obviously,
you want to keep your costs as low
as possible, but remember, this
does not mean keep your monthly
payment as low as possible! We are
talking about overall cost here.
When considering cost, then, first
of all make sure you are clear about
interest rates and how they are
calculated. Just like with credit
cards, a low introductory rate may
seem too good to be true - and it probably is. Most of the
time these are simply gimmicks to
lure you in. Look instead at your
effective interest rate over the
entire term of the mortgage, and
know how compounding is done!
Keep
in mind that most mortgages still
do have their interest calculated
semi-annually, but some do compound
interest monthly. Always remember
that the more often a mortgage rate
is compounded, the higher your effective
rate will be.
Term
Why is the term important? Simply
put, it generally will also equal
the length of time for which your
interest rate is guaranteed. Generally
speaking, the longer the term, the
higher the interest rate, but this
may not always be the case.
The
term you choose will boil down to
two main factors: your own risk
tolerance and your personal financial
situation. A longer term is a form
of insurance, since you're
guaranteeing that your interest
rate and payment amount will no
change over that term.
If you have
flexibility in terms of your personal
finances in that you can afford
to pay a few extra hundred dollars
a month if the interest rate goes
up, then that, too, can have an
impact on the term. Term, of course,
ties in with whether you have a
fixed or variable rate mortgage.
Variable vs. fixed rates
Let's face it, variable rate
mortgages are hot. With interest
rates being at rock bottom the past
few years, many consumers have saved
a lot of money by having a variable
rate mortgage. Variable rates are
usually based on the lender's
prime rate, meaning that your rate
goes up when the prime rate goes
up.
If you're looking at getting
a variable rate mortgage, read the
fine print carefully and be prepared
to shop around, since each lender
has a different "spin" on the variable rate mortgage they
offer. As mentioned earlier, remember
to look at the effective interest
rate over the entire term, not just
the introductory period. Remember,
too, that your interest rate is
not guaranteed, so very conservative
consumers or those in a tight cash
flow situation will probably want
to steer clear of variable rate
mortgages.
Flexibility
With increased competition among
lenders, flexibility has become
an even more important consideration
than before. Some things to look
for include your payment terms and
conversion options.
For example,
can you pay weekly, biweekly, or
monthly? Paying weekly, if you can,
can shave off interest over time,
but if you only get your paycheque
once a month, you may prefer a monthly
payment.
The ability to make extra
payments (and when) is also a consideration.
Some mortgages won't allow
you to do this, so if you think
you might have some extra cash once
in a while and might want to make
some additional payments, make sure
you look carefully for this option.
Another area of flexibility includes
the ability to convert your mortgage to a longer term.
In summary, although you will have
to do your homework, the savings
and flexibility are generally worth
it in the end. Remember, cost is
most important, but use the competitive
market to your advantage to get
what's right for you!
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