How Important is Rate?

Often times, borrowers are fixated on their mortgage rate because it’s the one aspect of their home financing they know to ask about. But, it’s important to look beyond mere rates into the bigger picture surrounding what’s significant when it comes to your specific mortgage needs.

If we dollarize the difference between 2.99% and 3.04%, for instance, it works out to an additional $2.66 in your monthly payment per $100,000 of your mortgage. Over the course of a five-year term, this culminates into just $159.60 per $100,000.

While “no-frills” mortgage products typically offer a lower – or more discounted – interest rate (like the 2.99% used in the example above), when compared with many other available products, the lower rate is really their only perk.

The biggest problem with looking at rate alone is that you may end up paying thousands of dollars in early payout penalties if you opt for a five-year fixed-rate mortgage, for instance, and then decide to move before the five years is up.

No-frills mortgage products won’t let you take your mortgage with you if you purchase another property before your mortgage term is up – ie, portability is not an option with this product. Portability is an important option that could save you money over the long term if the home of your dreams is within your reach before your mortgage term is up and rates have risen, which they have a tendency to do over a five-year period.

This type of product is only plausible for those who have minimal plans to take advantage of benefits that will help pay off your mortgage faster – such as prepayment privileges including lump-sum payments.

Essentially, this product is only ideal for: first-time homebuyers who want fixed payments and have limited opportunities to make lump-sum payments during the first five years of their mortgage; and property investors who need a low fixed rate and aren’t concerned with making lump-sum payments.

It’s understandable why these products may seem appealing. After all, not everyone feels they have the extra cash to put down a huge lump-sum payment. And who needs a portable mortgage if you’re not planning on moving any time soon?

But it’s important to remember that a lot can change over the course of five years – or whatever term you choose for your mortgage. You could get transferred, find a bigger house, have babies, change careers, etc. Five years is a long time to be anchored to something.

Many people won’t sign a cell phone contract for longer than three years that they can’t get out of, so why would they then sign a mortgage for five years that they can’t get out of?

The thing is, you can still obtain great mortgage savings without giving up the perks of traditional mortgages. For starters, many lenders are willing to offer significant discounts if you opt for a 30-day “quick close”.

And there are many other ways to earn your own discounts. For instance, by switching to weekly or bi-weekly mortgage payments, or by obtaining a variable-rate mortgage but increasing your payments to match those of the going five-year fixed rate, you’ll be ahead of the typical discount of a no-frills product before you know it – and you won’t have to give up on options.

Banks don’t give anything away for free – they’re there to make money. That’s why it’s essential to discuss the full details surrounding the small print behind the low rates. It’s also important to take into account your longer-term goals and ensure your mortgage meets your unique needs now and into the future.

As always, if you have questions about mortgage rates, or other mortgage-related questions, I’m here to help!

Know Your Options During Separation

Since most couples have a joint mortgage - one where both names are on the mortgage and title of the home - when separation or divorce proceedings get underway, many wonder what will happen with the home.

When the marriage comes to an end, there are two obvious options concerning the home:

1. Sell the property and split the proceeds according to your agreement and go separate ways; or
2. One person buys the other party out of the mortgage and the title of the property.

The first option is a straight-forward transaction where you put the house up for sale, sell and split the proceeds. The second option, however, is slightly more complicated.

The decision between the options is a personal one borne out of the specific circumstances of the parties involved. Perhaps there are young kids involved that need to stay in the house, the market is down and there will be a loss on the property that neither party can afford, one party can't afford to buy the other party out, etc.

Once the decision is made, how do you go about buying the other person out of a mortgage? Well, essentially, you're refinancing your mortgage, using a single income (the person who's buying the other party out of the house) and qualification, versus the original purchase, which was based on joint income and qualification.

If you're the one buying your partner out, the first step is to ensure that you can afford the mortgage payments.

This is imperative because the lender will ask for proof that you're capable of covering the mortgage in order for you to apply on your own. In addition to covering the mortgage amount, you'll have to come up with whatever dollar amount you have agreed on to buy the other partner out. This may come out of the equity in your home if it's sufficient.

In essence, if you can afford the mortgage on your own, the most common means of buying out your partner post-separation and transferring title out of the joint name and into your name, is to refinance. I can help you through each step of this process. And although the maximum refinance on a home is 80% of the appraised value, given the unique circumstances surrounding separation, you can often refinance up to 95% of your home's value.

If you're not in a financial position to buy your ex-partner out of the house, and you agree to both stay on title and have payment arrangements, there's one warning to be taken very seriously - just because one person is responsible for the payments (even with a court order), if the mortgage goes into default, both parties on the mortgage will be affected.

The most important piece of advice when dealing with a mortgage during a separation is to become informed. Know your options, talk to professionals about your options and make an informed decision regarding your home and mortgage.

As always, if you have any questions about the information above or your mortgage in general, I'm here to help!