As home owners, we often find ourselves shopping for a mortgage several times throughout the life of the mortgage to seek the best we can possibly get. But what are we looking for when we are shopping for a mortgage and what are the things that we should consider to really know that we have the best we can possibly get? A great mortgage is often times associated with the lowest rate available and other elements tend to get lost in the background. In addition to the interest rates, when shopping for a mortgage there are few other things that are important to consider. Below is a basic scenario in which you might find yourself when shopping for a mortgage, followed by items to consider and how they will affect your decision and determine whats really best for you:
SCENARIO:
Jack and Emily are newly married and are shopping for a mortgage of $300,000. Emily works full-time and is also expecting a child in the next 6 months. Jack also works full time as a sales person at a car dealership. Emily and Jack also plan on selling their home in the next 3 years to up-size their living space.
1. Amortization
The amortization of the mortgage is essentially the number of years it would take to pay off the mortgage (with a few assumptions taken into account). Generally speaking, increasing the amortization will not only increase the length of time it would take to pay off the mortgage but also decrease the monthly payment amount. In the above example, where the couple are shopping for a mortgage, they may need to consider the amortization that they are comfortable with. Since they are expecting a baby, they may want to increase their cashflow by decreasing their monthly mortgage payment (by increasing the amortization).
2. Interest Rate
The Interest rate is the most popular item that people look at when shopping for a mortgage. Essentially, the goal of ever homeowner is to own their home with the least amount of interest paid throughout the process. In the above example, the couple are shopping for a mortgage and it is reasonable to assume that they have already considered the interest rate.
3. Prepayment Privileges
Prepayment privileges come in handy, allowing home owners the flexibility of making additional payments, or lump sum payments which knock off the principle directly. When shopping for a mortgage, these options are very important to consider because the more payment you make towards your mortgage, the less interest you will pay on the rest of the principle balance over the course of the term (and schedule). Jack is a sales person at a dealership which implies a commission environment with fluctuations in monthly income. Jack my want to contribute more money towards his mortgage during times of increased cash flow as a way to reduce his principle.
4. Penalty
Penalties are important factors to consider when shopping for a mortgage. Often times, some mortgages have severe penalties in the event that the mortgage is refinanced or paid back in full, prior to the terms completion. These penalties are often associated with the lowest interest rate mortgages and are usually not thoroughly considered because of the inciting interest rate on these mortgage products. Notice that in the above example, Jack and Emily are shopping for a mortgage but are also expecting to sell their property in about 3 years. If they are locked in a mortgage with high penalty conditions, the couple are looking to face unfavorable fees because they can walk away from the mortgage. Often times the money saved on the interest rate is erased by the penalties paid upon breaking your mortgage.
5. Term
The term is an important element when shopping for a mortgage because it determines the length of time that all the conditions of the current mortgage will remain fairly stable (with exceptions) and for how long you have a mortgage with a specific lender. Jack and Emily, may not want to get into a mortgage greater than 3 years, since they clearly have the intention of selling in this amount of time. Notice that even if the mortgage has penalties for early repayment, the penalty would not apply since the mortgage has come to term.
There are many more things to consider when shopping for a mortgage but in addition to items above, it is important to evaluate your short & long term goals with addition consideration to your current and future (foreseeable) circumstances. Consideration to your circumstances and goals will help answer your mortgage related questions and ultimately help you decide on the best mortgage for you. Remember, the best mortgage is not just the one with the lowest interest rate, but one that works with your lifestyle, financial circumstances and your short-long term goals.
If you are shopping for a mortgage, or would like to learn more on the matter, please contact us and will be happy to speak specifically to your situation!