Why get a pre-approval?

For most Canadians, mortgages are a fact of everyday life – if you are in the home buying stage you’ll most likely require a mortgage.

Making the decision to buy a home is a big life event, probably the most significant in your life. Buying a home is as much an emotional investment as a financial one – having a place of your own may evoke feelings of self-esteem, security, and excitement, also bringing new responsibilities.

I understand that, as exciting as this journey may be, it can also be a little frustrating and intimidating for you.

A big part of buying a home is finding the right mortgage product that you can truly live with. This is why it pays to talk to a mortgage professional: they can provide innovative mortgage products that can be tailored to your own financial situation, giving you the flexibility to enjoy your new life and your new home.

Pre-qualifying

Before you begin your search for that dream home, GET PRE-QUALIFIED for a mortgage.

Supported by your current financial situation and a satisfactory credit review, a pre-qualified mortgage will tell you the amount you can borrow, the interest rate and how much your monthly payments will be.

Having this information available to you along with your down payment enables you to shop more effectively within your comfort zone and knowing that financing may be available (usually subject to a property appraisal).

Knowing your financial limits, you are ready to purchase your home right now and it can also assist you in negotiating a better price for your home.

When you have been pre-qualified for your mortgage, the interest rate and payments are guaranteed for up to 120 days from the date you receive the pre-qualification.

Should mortgage rates go up during that time, the lower guaranteed rate will apply and if rates go down during that time, than the lowest rate up to the date of funds are received apply. This feature of pre-qualifying you gives the protection from interest rate fluctuations. 

For more information contact your Toronto Mortgage Broker at 416-920-9931

Follow me on Twitter

Like us on Facebook

What every home owner should know about Refinancing…

What every home owner should know about Refinancing…

Surrounded by a sea of Refinancing confusion!

There are probably many “lifesaving” tips people have thrown you to help determine the right time to refinance your home. You may have heard that the interest rate on the new loan must be at least two percent less than the old loan, or it is not a good decision. Another frequently quoted, but just as frequently incorrect statement, is that if your loan is less than two years old, your shouldn’t refinance it now.

Neither one of these statements is entirely correct, and it can be extremely difficult to receive unbiased and accurate information about the refinancing decision and process. It is our desire to offer you a clear, concise guide to help you get rescued from that sea of refinancing confusion.

When should I refinance my home mortgage?

Put very simply, the decision to refinance a home should be based on whether you will own the property long enough to recapture the expense connected with the new loan and the overall effect lower payments will have on your household budget. The way to figure this can be as easy as subtracting the proposed new overall payments from the existing overall payments to find out what the monthly saving will be. Then, divide the monthly saving into the cost of refinancing to determine how many months it will take to recapture that cost.

There are some situations in which a refinancing decision should invariably be made. If you are able to negotiate a “no-cost” mortgage (you pay no penalty or closing costs), and if the new mortgage rate is lower than your existing rate, than refinancing your loan would certainly be of financial benefit to you.

If the remaining mortgage balance, including penalty and closing costs, can be refinanced at a reduced monthly payment, and still be paid off within your existing mortgage payment term, then refinancing would be highly advisable. If you need extra cash for a home equity or auto loan, and the mortgage rate is lower than alternative loan rates, then refinancing is probably the best choice.

Lastly, you can generally count on it being time to refinance when your new mortgage rate is at least one to two points lower than your existing rate, and you plan on staying in your home for at least three to five years.

What Refinancing Myths Do I Need to Watch Out For?

1.  Blending your existing rate with your current lender!

This is the most common technique all lenders will try on you. They hope you do not know how to compare what this means and that you will not shop around. HUGE MISTAKE! Sometimes blending is in your favor, and if it is, we will tell you that. However, more often than not, it is not in your favor, and a new mortgage rate will save you thousands of dollars in interest costs!

2.  One widespread myth that needs to be dispelled is the idea that lowered monthly payments are the financial yardsticks that wise financing is measured by. Monthly payments are only comparable if they are based on the same loan duration! In fact, lowered monthly payments are can be achieved even at a higher mortgage rate, if the new mortgage has a longer term than the remaining years of the old mortgage.

3.  Another common misconception about refinancing is that if the new rate is not at least two points lower than your existing mortgage rate, then refinancing is not worth the time and trouble. In many cases, especially if you are planning to stay in your home at least three to five years, even a one-point reduction can make an enormous difference in your overall home mortgage cost. In addition, with the constant technological advances in the mortgage industry, obtaining a mortgage loan r refinance is now faster and easier than ever before.

What Exactly Do I Need To Consider About Refinancing My Home?

To accurately sum up your refinancing decision, you need to thoroughly consider the following six factors:

1. The amount of reduction in the mortgage interest rate.
2. The amount of reduction in the monthly payment.
3. Any prepayment penalties on the old mortgage.
4. The amount of closing costs, including any appraisal of CMHC costs, legal fees, etc.
5. The number of years you plan on retaining your home.
6. The effect on your cash flow overall lower payments could make.

What Will Actually Be Involved When I Refinance My Home Mortgage?

When you refinance, the proceeds from your new mortgage loan are used to pay off your old mortgage, bank loans, credit cards or new money for renovations or any other worthwhile purpose. Even if you use the same lender this is true. You are not simply re-negotiating the terms of the old mortgage, such as reducing the interest rate.

You need to expect that your home will have to be appraised again, and possibly inspected. Your credit history and overall financial picture will be reviewed again to make sure you qualify.

Of course money doesn’t grow on trees, but if it is truly the right time for you to refinance, then with they money you will be saving after twelve to eighteen months, you should begin to feel like your money trees are in full bloom!

For more information contact your Toronto Mortgage Broker at 416-920-9931

Follow me on Twitter

Like us on Facebook

Short vs. Long term mortgage - What is best for you?

Almost every time that I arrange a mortgage for one of my clients they ask me whether they should go with a shorter or longer term.

My answer: for some people having a long-term mortgage makes a lot of sense, for others a short-term mortgage will best meet their needs.

Of course there is no one right answer here.

When you are selecting the term for your mortgage it is important to recognize that generally the longer the term of your mortgage, the higher the interest rate.

A good way to think of the difference between a short vs. a long-term rate is an insurance premium. The financial institution generally wants to be compensated by you in order to be compensated by you in order to guarantee the rate of your mortgage over a longer period of time. What you have decided is whether or not the insurance premium (difference between short vs. long term rates) is worth paying in your circumstances.

Many people have heard the theory that you are better off to keep on renewing with short terms and paying down your mortgage. This philosophy has held true in the past provided that the extra amount that you save from selecting a short term is applied to reducing your principle mortgage balance outstanding.

There is potential to gain by using this method, but you are also exposed to risk that rates could be substantially higher by the time you have to renew.

Many of the consumers in today’s market are buying homes with 5% down and extending their debt servicing to extreme levels. While I believe that the dream of home ownership is a very fulfilling and a worthwhile pursuit, I caution that you should do your financial planning carefully.

It is important to realize that interest rates today are at near historical lows. Many people who can afford homes today would never have been able to make that purchase at the interest rates of five years ago.

It is critical that you understand the following: YOU REPAY VERY LITTLE OF YOUR PRINCIPAL BALANCE IN THE FIRST FEW YEARS OF YOUR MORTGAGE.

This means that the people who are in jobs that will likely see very little pay increase over the next few years should definitely consider the consequences. Historically, over the last 30 years the average five-year mortgage rate has been approximately 11%.

Ask yourself this question: if mortgage rates are at 11% when you have to renew- will you be bale to afford to keep your home?

If your answer is a comfortable yes, then I suggest that you pick the term that you feel happy with.

If your answer is even possibly no, then find as long term as possible. By the time a 10 year term comes up for renewal you will at least have paid a large portion of your principal off, and may be able to extend your financing over a longer term in order to make your payments more affordable.

If the property you are financing is being used, or is going to be used as an investment property then again the longer-term mortgage product also makes sense.

Remember there is no mortgage product that can be all things to all people. Make sure you get informed and find the product that best meets your needs. Until next time, best of luck finding your mortgage and home.

Be Financially Smart and NOT Ignorant!!!

I want to thank Maria who called me 2 weeks ago for encouraging me not to stop writing these articles. Sometimes, I wonder if anyone is actually reading them. But, I am glad that there are those who still read and not just listen to the news on TV.

I want to review some things that I believe are extremely important for people to know prior to making decisions that are not wise. The million dollar question is to fix or not to fix your mortgage? Those who decide to fix are not making a smart decision.

Why? 

Most first time homebuyers make the mistake by going with a 5 year fixed mortgage. They do this because they want peace of mind and do not want to think about their mortgage any further. Like most people, especially those who work in construction, do not have the time to keep an eye on the rates. They leave the house at 6 am to start their work day at 7 am. They usually get home around 6 pm. They will have dinner with the family and try to spend some quality time with them. Then around 9 or 10 o’clock in the evening they are watching the news and then all of a sudden the TV is watching them fall asleep. These individuals think that the interest rates will sky rocket from 2.89 (today’s 5 year fixed) to 8 or 9% overnight which is IMPOSSIBLE.

I have been advocating variable mortgages for the last 15 years. Those who took my advice are now laughing. But those who didn’t are now crying. Remember when rates go up, no one complains. But when rates go down and you want to get out of the fixed mortgage to take advantage of the new lower rates, there will be penalties to pay. In contrast, a variable to a fixed rate mortgage there are no penalties or costs to lock into a fixed rate mortgage.

In Sept 2010, I met with a client which I will name Sr. Jorge. He had just bought a house and he was quoted a rate for 5 yr fixed at 2.99. I told him that was an excellent rate. However a variable mortgage would be much better. How so? Well, first of all not all banks have a variable mortgage at prime minus 0.80 at 2.20%.  In order to be competitive in the market some banks are offering a low rate for 5 year. They are putting a carrot in the front of the horse to see if the horse will bite on it.

Sr. Jorge was a bit hesitant to go with a variable mortgage but he took my advice and now he is extremely happy with the decision. His original mortgage was $132,875.45. He now owes $91,458.76. So in two (2) years he has managed to reduce his mortgage by $41,417. So you are asking how on earth did he manage to do this?

Very easy!!! He managed to make his monthly payments of $1,329.57 (based on the 5 year fixed) the same on a monthly basis but he went variable. The monthly payments did not change. However, the principle portion increases and the interest is reduced each month.

                                                            Interest                         Principal

            May 01                                    325.66                         1,003.91

            June 01                                    308.09                         1,021.48

            July 01                                     295.62                         1,033.95

So let us do some math at this stage. Based on a mortgage for $250,000 at today’s 5 year fixed rate at 2.89% the monthly payments would be $1,169.03. The principal portion would be $570.54 and the interest 598.49.

But, based on a variable mortgage at prime (3%) minus 0.40 = 2.60% the monthly payments would now be $1,132.39. The principal would be $593.63 and the interest would be $538.76.

Let is now assume that if the prime rate goes up to 3.25 minus 0.40, the variable rate would now be at 2.85%. Based at 2.85% the monthly payments would now be $1,163.94 The principal would be $573.68 and the interest would be $590.26                       

So if you didn’t know any better you would go fixed at 2.89 for a monthly payment of  $1,169.03. However, the smart people would still continue to make that payment of 1,169.03 but go variable.

Why? More principal will be applied towards your mortgage.

By forcing yourself to make the payments of $1,169.03 and not $1,132.39 (2.60% variable) you are still throwing $36.64 more of principal plus the principal portion on the variable mortgage which is $593.63 = 630.27 on a monthly basis. Now $630.27 x 6 months = $3,781.62 towards principal.

Now let us assume that prime rate goes up to 3.25 minus 0.40 = 2.85%. The payments would still continue to be the same at $1,169.03 (still based on the 5 year fixed). However, now the principal portion would be less cause 1,169.03 minus $ 1,163.94 = $5.09 plus the principal portion on 2.85% ($573.68) = $578.77 x 6 months = $3,472.62 towards the mortgage.

In the end result you have thrown $3,781.62 plus $3,472.62 = $7,254.24 AT LEAST towards the mortgage within one year in the variable mortgage.

Why do I say AT LEAST $7,254.24?

Remember Sr. Jorge? His payments never changes per month. But his principal portion would increase each month. That is why he was able to throw $41,417 toward his mortgage within 2 years.

Now let’s compare the fixed 5 year. The principal portion was $570.54 x 12 months = $6,846.48 the difference between the two is $407.76 ($7,254.24 minus $6,846.48).

If 10,000 customers decided to lock into a 5 year fixed mortgage, $407.76 (savings on a variable mortgage compared to a fixed mortgage) the bank would make $4,077,600 millions of dollars.

So, next time when you hear that the banks are making millions of dollars and you get upset, remember you just helped them to make more millions of profit.

Remember folks, math never lies. We tend to make decisions based on emotion and not on logic. If you had a choice to put more money into your pocket versus giving it to the bank, what would you chose? So next time when you hear that the banks are making millions of dollars in profit, remember on thing- you just helped the bank make more money off you by deciding to go with a fixed mortgage.

So be financial smart and not financial ignorant!!!!

For more information contact your Toronto Mortgage Broker at 416-920-9931

Follow me on Twitter

Like us on Facebook

Quick Tips for the first-time homebuyer

Buying your first home is an exciting new experience. Attending open houses, putting in an offer to buy and decorating your new home to suit your style is all part of the excitement. All the decisions that need to be made can also make you feel nervous. Here are a few tips that can help out the anxious first-time home buyer.

How much can I afford?

There are two things to consider when determining how much home you can afford. How much do you have for your down payment? What amount can you afford as a monthly payment while still enjoying life? To help answer these questions talk to a mortgage professional.

To shop for a home with confidence, you can obtain a pre-approval certificate from your financial institution. This document will tell you how much of a mortgage you can afford.

How much do I need for my down payment?

You can buy a home for as little as 5% of the purchase price. However, any mortgage with a down payment of less than 20% has to be insured by a third party such as the Canada Mortgage and Housing Corporation (CMHC). The amount of your down payment will determine whether you need to insure your mortgage or not.

• Conventional Mortgage- a mortgage where you have at least 20% of the purchase price.
• High-Ratio Mortgage- a mortgage where you have less than 20% of the purchase price.

Your insurance premium will depend on the amount you are borrowing and on the percentage of your down payment amount. Premiums usually vary between 1.00% and 2.75%.

How can I save for a down payment?

There are a few different methods that can be used when saving for your down payment:

• Setting money aside each month just as if you had to make a monthly payment
• Opening a RRSP investment account. If you are a first-time homebuyer you and your spouse can use up to $25,000 each towards your down payment without tax implications as long as you repay the amount within 15 years.
• A cash gift from a parent or relative.(“gift” means its non-repayable)

Should I be aware of any additional cost?

Your mortgage will cover off the purchase price of your home, however there are other costs and can usually amount to 1.5% to 3.5% of the total cost of your home. Here are a few examples of the hidden costs of home ownership associated.

• Appraisal fee
• Home inspection
• Property survey
• Land transfer tax
• Legal fees
• Sales tax
• Title insurance
• Home insurance

Also, don’t forget to consider general expenses such as moving and home decorating costs.

Always be an informed client.

For more information contact your Toronto Mortgage Broker at 416-920-9931

Follow me on Twitter

Like us on Facebook

Mortgage lenders view six factors when evaluating applications

Does applying for a mortgage seem too complicated? Knowing how your application will be evaluated will better equip you to evaluate your financial strengths and weaknesses. Having all your documentations ready will make the approval process much quicker and easier.

Lenders look at six factors when evaluating an application your identity, your income, debts, employment history, credit history, and the value of the property.

YOUR IDENTITY

In order to protect against mortgage fraud, the lender or their lawyer will require picture identification to ensure you are the individual you represent yourself to be. In addition, you may be asked questions regarding your credit history to verify information on record at the credit bureaus.

YOUR INCOME

The lender will measure your income level against the amount of the mortgage payments, property taxes and condo fees, to decide whether you can comfortably afford a home. Your lender will compare your current housing expenses to the expenses you’ll have if you buy a home. The smaller the increase, the stronger your application looks. Usually a guideline of 30 per cent of your pre tax income is used to determine your maximum payment level.

YOUR DEBTS

The lender will look at your debts, including your anticipated house payments, as well as all loans, credit cards, child support and any other payments that you make each month. The ratio of the payments on these debts to your gross monthly income results in a total debt service ratio. The generally accepted total debt service ratio for all housing and other obligations is 42 per cent of your pre tax income.

YOUR EMPLOYMENT HISTORY

Mortgage lenders are more likely to lend money readily to people who have a history of steady employment. You will need to provide a letter or pay stub from your employer and the lender may further verify your employment by contacting your employer. If you are self employed or have been at your job less than two years, they may ask for other documentation, such as business financial statements or federal income tax returns.

YOUR CREDIT HISTORY

Good credit is very important in qualifying for a loan. A mortgage lender will look at your credit record to see how well you’ve paid your loans and other debts in the past. If you’ve never had a loan or credit card, you can still demonstrate a good record by showing timely payments of utility bills and rent. It’s a smart idea to review your own credit report and score before applying for a loan. For a small fee, a credit bureau will provide an instantaneous, complete online credit report and credit score that details your current debts and payment history. They also detail what your score level means, how you compare to others, and provide tips to improve your score. You also may receive tour credit report (without the credit score) by mail for free by contacting the credit bureau.

THE PROPERTY’S VALUE

When purchasing a property, you should be comfortable that the price you are paying is reasonable and will be acceptable to the lender. You can usually confirm the value is reasonable by obtaining an appraisal from an accredited appraisal professional or from the Realtor who is representing you in the purchase. Some purchasers may also obtain a property inspection to confirm the property’s condition and identify any items that may require repairs.

Lenders also tend to evaluate your application against the following guideline:

• A housing expense ratio no greater that 35 per cent (the lower the ratio, the better)
• A debt-to-income ratio for all debts no greater than 42 per cent (the lower the ratio, the better)
• The home buyer has steady income ideally, the same job for two years or longer
• The home buyer had good credit (bills have been paid on time)
• The house is worth the price the buyer is paying

Always be an informed client.

For more information contact your Toronto Mortgage Broker at 416-920-9931

Financing & What happens if it goes wrong

First of all, before you go house hunting, go to your bank, trust company, or other financial institutions and see what mortgage amount you can qualify for.

Take your significant other, if you have one, because everyone’s income and assets help.

Once you know how much you can get, get the best rate you can and get it locked in for as long a time period as possible.

Do not be afraid to negotiate- the banks want and need your business. And do not be afraid to shop rates and lockup periods.

Get your commitment in writing!

Remember, time is important because of the time it takes to have your house ready, and remember to allow for extensions or construction delays.

Now, we are ready for the builder. Go to the sales office armed with your knowledge, and look to see what mortgage rate and term the builder is offering.

Take note, the builder may have brought the rate down to make his package more attractive, or may have persuaded his bank as part of his deal with them to offer special packages.

Remember, if your banks offered rate and terms are close, you may be able to negotiate a better deal with the builder. If you don’t take the builder mortgage, you may be able to get some leverage in your overall negotiations, as the builder may save money by not having to pay his bank for the better rate. Question this and make sure you understand all of the financing details.

When we walk into that sales office all ready to buy our beautiful new home, perhaps the most important piece of the puzzle is security in our financial arrangements.

A tragedy waiting to happen occurs when you sign an unconditional offer, give your hard earned and saved deposit to the builder, and later find out you do not qualify for the mortgage.

In other words, don’t buy the house unless you have a mortgage commitment or a conditional deal! This leads us into the next part of today’s discussion- what happens if it goes wrong?

An Agreement of Purchase and Sale for the purchase of land is a contract, and, once it is unconditional, binds both of the parties to do the things that they are obligated to under that contract.

If either party does not perform their part of the bargain, they can be held liable to the other party for either specific performance or damages.

Firstly, if the purchasers default, they will likely lose their deposit. The builder will then option of suing to force them to close the deal and pay all legal fees related thereto (specific performance), or sue them for any damages the builder might suffer before he resells the house (things like interest, changes, price differential, etc.) and legal fees.

Sometimes in a booming market, kindhearted builders will release purchasers who have made a mistake or encountered personal tragedies, but don’t count on it!

The moral of the story is make sure you have financing, or that the offer is conditional for a few days pending both financing and review by a lawyer. It is critical that you get the right advise: that is the law. When you select a lawyer, find one who cares about you and a long-term relationship.

Good luck and happy house hunting.

Always be an informed client.

For more information contact your Toronto Mortgage Broker at 416-920-9931