Selecting Your Best Mortgage Term

Choosing the mortgage term that's right for you can be a challenging proposition for even the savviest of homebuyers, as terms typically range from six months up to 10 years. By understanding mortgage terms and what they mean in dollars and sense, you can save the most money and choose the term that is best suited to your specific needs. The first consideration when comparing various mortgage terms is to understand that a longer term generally means a higher corresponding interest rate. And, a shorter term generally means a lower corresponding interest rate. While this generalization may lead you to believe that a shorter term is always the preferred option, this isn't always the case. Sometimes there are other factors – either in the financial markets or in your own life – that you'll also have to take into consideration when selecting the length of your mortgage term. If paying your mortgage each month places you close to the financial edge of your comfort zone, you may want to opt for a longer mortgage term, such as five or 10 years, so that you can ensure that you'll be able to afford your mortgage payments should interest rates increase. By the end of a five- or 10-year mortgage term, most buyers are in a better financial situation, have a lower outstanding principal balance and, should interest rates have risen throughout the course of your term, you will be able to afford higher mortgage payments. If you're shopping for a mortgage for an investment property, you'll likely want to consider choosing a longer mortgage term – depending, of course, on your overall plan. This will allow you to know that the mortgage payments on the property will be steady for a long time and enable you to more accurately project your future income from the property. As well, if you know you will not be staying in the same home for the next five or 10 years, opting for a shorter term can save you significant fees when it comes to early payout penalties. Choosing the right mortgage term is a unique decision for each individual. By understanding your personal financial situation and your tolerance for risk, I can assist you in choosing the mortgage term that will work best for your situation. As always, if you have any questions about mortgage terms or your mortgage in general, I'm here to help!

Nail the Right Term Length First ...

Finding a good mortgage rate online is a cinch. Anyone who has ever looked for rate comparison sites knows the Internet is packed with them. But determining the best mortgage term – the length of the mortgage contract – is trickier because up-to-date term comparisons are hard to find. Although mortgage terms are often overshadowed by the intense focus on mortgage rates, it pays to put a lot of thought into term selection. It's the No. 1 factor in determining how much interest you'll fork over to a lender. Read more ...

Clarifying Mortgage Penalties

Last month, the federal government published a Mortgage Prepayment Code to ensure borrowers are better informed by lenders (federally regulated institutions) when it comes to situations where mortgage prepayment penalties may be charged – namely, for the purpose of clarifying interest rate differential (IRD). This is a positive step, because IRD calculations and penalties have traditionally been very confusing to borrowers. IRD is a charge many borrowers face when paying off a mortgage prior to its maturity date, or by paying the mortgage principal down beyond the amount of annual allowable prepayment privilege limits. And IRD penalties can prove quite costly depending on the remaining mortgage term. IRD is based on: 1) The amount that is being prepaid; and, 2) An interest rate that equals the difference between the original mortgage interest rate and the interest rate that the lender can charge today when re-lending the funds for the remaining term of your mortgage. Most closed fixed-rate mortgages have a prepayment penalty that is the higher of three months' worth of interest or IRD. The new code requires that lenders "provide the information in language, and present it in a manner, that is clear, simple and not misleading."

The Code requires lenders to provide, among other things:

1. Annual Prepayment Information. This includes such things as prepayment privileges that the borrower can use to pay off their mortgage faster without having to pay a prepayment charge. Examples include making lump-sum prepayments, increasing the regular payment amount and increasing the frequency of the payment to weekly or bi-weekly. Lenders must also inform borrowers of the dollar amount of the prepayment that the borrower can make on a yearly basis under the terms of their mortgage without having to pay a prepayment charge. As well, an explanation must be provided on how the lender calculates the prepayment charge for the borrower's mortgage (for example, a certain number of months' interest or IRD). 2. Information Provided When Borrower Faces a Prepayment Charge. If a prepayment charge applies and the borrower confirms to the lender that the borrower is prepaying the full or a specified partial amount owing on their mortgage, the lender will provide, among other things, a written statement to the borrower including the applicable prepayment charge and a description of how the lender calculated the prepayment charge (for example, whether the lender used a certain number of months' interest or IRD). If the lender used IRD to calculate the prepayment charge, the lender will inform the borrower of: the outstanding amount on the mortgage; the annual interest rate on the mortgage; the comparison rate that was used for the calculation; and the term remaining on the mortgage that was used for the calculation. 3. Enhancing Borrower Awareness. To assist borrowers in better understanding the consequences of prepaying a mortgage, lenders will make available to consumers information on the following topics: differences between various types of mortgages; ways in which a borrower can pay off a mortgage faster without having to pay a prepayment charge; ways to avoid prepayment charges (for example, by porting a mortgage); how prepayment charges are calculated, with examples of the prepayment charges that would apply in specific circumstances; and actions by a borrower that may result in the borrower having to pay a prepayment charge. Click here for full details of the code requirements from the federal finance department. As always, if you have questions about mortgage penalties, or other mortgage-related questions, I'm here to help!

Become Mortgage Free Faster

Regardless of how long you've had your mortgage or how large or small the current balance is, there are a variety of ways to make prepayments work for you to pay down your mortgage faster and, therefore, pay less interest throughout the life of your mortgage. After all, each extra payment amount will reduce your principal balance, which, in turn, reduces the amount of interest you'll have to pay on your borrowed mortgage amount. Most lenders allow you to make a lump-sum payment of anywhere between 10% and 25% of the value of your mortgage per year. The lump-sum payment is based on either the original amount you borrowed or the amount currently outstanding. Since mortgages decrease with each payment, it's best to negotiate a lump-sum payment option based on the original amount you borrow. That way, if you come into an inheritance, a bonus or save some extra money, you can pay down the largest amount possible. Another factor to consider is when you can make a lump-sum payment. Some mortgages allow prepayments throughout the year, while others permit them only on the anniversary date. Still others allow you to make prepayments on the day you make your regular payment. If you can't pay the maximum prepayment amount, it's still worth your while to at least make some form of extra payments, even if it's a few thousand dollars each year. That will still save you thousands of dollars in interest payments throughout the life of your mortgage. Another prepayment option involves taking advantage of flexible payments. Most lenders allow you to increase your regular payment up to a set maximum, such as 15%, while others allow you to double up your payments. If, for instance, you have a $1,000 per month mortgage payment and increase it by 15% to $1,150, you could shave off as much as five-and-a-half years on a $200,000 mortgage. Even rounding up your mortgage payments a few dollars each payment can help make your balance decline sooner. If you round up your mortgage payment from, say, $766 to an even figure such as $800, you can feel confident in knowing that every extra bit goes toward your principal. You can also pay off your mortgage faster by moving to a different payment schedule. Instead of making monthly payments, make them biweekly or even weekly. Using an accelerated mortgage payment plan – where you make payments every two weeks as opposed to twice a month – you actually make one extra payment each calendar year. By paying more and paying faster, you reduce your principal earlier, which lowers the amount of interest you pay. As always, if you have questions about paying your mortgage off quicker, or other mortgage-related questions, I'm here to help!

Refinancing to Ease Holiday Spending Woes

Planning ahead really can save you money down the road. And with the high-cost holiday gift-buying and entertaining season quickly approaching, this may be the perfect time to refinance your mortgage and free up some money instead of relying on high-interest credit cards. You may find that taking equity out of your home will help bring joy back into your holiday season – and start the New Year off on a debt-free note, as you may also be able to use some of the equity in your home to pay off high-interest debt such as your credit card balances. This will enable you to put more money in your bank account each month. And since interest rates continue to hover near historic lows, switching to a lower rate may save you a lot of money – possibly thousands of dollars per year. There are penalties for paying your mortgage loan out prior to renewal, but these could be offset by the lower rates and extra money you could acquire through a refinance. I can sit down with you and work through all of the equations to ensure this is the right move for you. With access to more money, you'll be better able to manage both your holiday spending and existing debt. Refinancing your mortgage and taking some existing equity out could also enable you to do many things you've been longing to accomplish – such as purchasing an investment property, taking that well-deserved vacation, renovating your home or even investing in your children's education. Paying your mortgage down faster By refinancing, you may extend the time it will take to pay off your mortgage, but there are many ways to pay down your mortgage sooner to save you thousands of dollars in interest payments. Most mortgage products, for instance, include prepayment privileges that enable you to pay up to 20% of the principal (the true value of your mortgage minus the interest payments) per calendar year. This will also help reduce your amortization period (the length of your mortgage), [...]

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