Special to Financial Post, March 22, 2014 - Choosing the right mortgage is never easy. With an increasing choice of options available, the need for careful selection has never been greater. Not only are home buyers faced with a wide array of mortgage products, they seem to have less time and energy for sorting out what’s best for them.
“There’s a lot more that comes into play when determining which mortgage is right for you,” says Todd Lawrence, senior vice-president, CIBC products and payments.
One of the most important things to determine from the outset is what you can afford, he says. “Home buyers need to look beyond the immediate considerations such as interest and monthly payments to get a true picture of what they can comfortably manage.”
For example, buyers should be aware of the many additional costs that go with acquiring a new home. These include closing fees, land transfer tax, GST/ HST, mortgage life insurance and legal fees. In some cases there may be survey, home inspection and appraisal costs. If you have a high-ratio mortgage (i.e. your down payment is less than 20% of the value of the home), you will also be required to pay a one-time insurance premium that is based on your mortgage amount.
There are also ongoing expenses to consider when determining what you can afford, including property taxes, home owner’s insurance, utilities and home maintenance, or condo or home owners’ association fees where applicable.
When doing the math, take into account any potential changes that may impact your ability to make payments. Do you see your household income increasing dramatically over the foreseeable future? Are you planning a family or do you expect to move often?
It’s also important to factor in the cost of your down payment and other debts, from loans and lines of credit, to credit cards. An advisor can help you determine your debt-to-income ratio to make sure you are not getting in over your head, Lawrence says.
When it comes to the mortgage itself, there is an equally wide range of considerations that will determine the best amortization, interest and payment schedule for you.
Here are some important basics you should know:
The amortization period is the estimated number of years it will take you to pay off your mortgage (typically 15, 20 or 25 years). The longer the period, the lower your payments.
The mortgage term is your current contract to pay your mortgage under the terms you’ve negotiated with your lender. When that term expires, the mortgage can be renegotiated. At that point homeowners have an opportunity to pay down a portion of the mortgage, change the payment schedule, or shorten the amortization period.
A fixed-rate mortgage is one in which the interest rate remains the same throughout the term.
Typically a variable-rate mortgage fluctuates with the prime rate throughout the mortgage term. While your monthly payment remains constant, the amount of principal that you pay off each month will differ.
Accelerating mortgage payments can help you save thousands of dollars in interest, as well as reduce your amortization by years in many cases, Lawrence says. “That’s why it’s important to think carefully about how much flexibility you can build into your mortgage.”
Increasing payments during a term, for example, will pay down the principal faster. You can also make more frequent payments. CIBC offers monthly, semi-monthly, bi-weekly and weekly payment frequency options.
A pre-payment option allows you to make a lump sum payment each year. This amount goes directly to your outstanding principal. It’s a good idea to review your options at the time of your term renewal. That’s also an ideal time to pay a lump sum (no limit) on your principal, if you have additional funds available.
A mortgage advisor can play a key role in helping buyers navigate the mortgage waters and understand which combination of features make the most sense. CIBC has made the task even simpler with its wide network of mobile advisors dedicated to assisting home buyers anytime at any location across Canada.
To find a CIBC mobile advisor near you, visit the website: cibc.com/mortgageadvisor
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