Are you on the fence about entering into a new mortgage? If so, chances are that you’re in limbo because you’ve been misinformed about a few things. Yes indeed, there are misconceptions floating around out there that can cost you time and money because they’ve caused you to delay your investment. Today, we intend to nip some of the big ones in the bud by dispelling the folklore that would have you missing out of some very lucrative opportunities.
4 Myths and Misconceptions About Mortgages You Need to Know Before You Get One
1. Going Straight to the Bank Saves You Money
We know, the age-old adage about cutting out the middleman to save a buck may rein true in many dealings. But when it comes to getting a mortgage loan this couldn’t be further from the facts. Previously detailed in our article on Why You Need to Use a Mortgage Broker, the notion bears repeating here too. A mortgage broker is an intermediary that works for you. Are they bias in the way that a loan officer is bias in favor of the big banks? For sure, but in this scenario they are biased to your benefit. Those commissions and fees that you’re worried about? They don’t compare to the rates that a good broker will get you on the market.
You may have a great relationship with your local bank, teller, and branch manager. Because of this you feel comfortable going directly to their loan officer when the time comes for a mortgage. But all that free coffee, donuts, and light conversation is a smokescreen. They know that as a loyal customer you are less likely to shop around and vet their quoted rates. But what you may not know, is that those advertised rates are often significantly higher when compared to what the market can offer. On the flip side (the one that is on your side) a mortgage broker is privy to “bulk discounts” (for a lack of better terms) because of the volume of business they bring to banks and lenders as a licensed professional. You directly benefit from these rate and can save thousands in the process by going straight to a broker, and not the bank.
2. It’s Always Better to Pay-off Your Mortgage as Fast as Possible
You may expect a windfall or other lump sum that allows you to pay off your mortgage faster than the terms dictate. Makes sense, right? Sometimes it does, but most certainly not always. Instead, lowering your principal (and loan balance) may pale in comparison to what that same money can do for you in a more lucrative investment. The interest that those investments deliver could be higher than that you pay on your mortgage. In addition, your mortgage’s interest may serve as a very important tax deductible when the CRA comes calling.
3. The 5 and 20 Downpayment Rule
What’s the 5 and 20 rule, you ask? Starting with the latter, it states that you need at least 20% get a decent loan, and that you need to put at least 5% down to get a mortgage in the first place. While this law is steeped in historical truisms (sort of) it is an antiquated one today.
To begin with, you don’t have to come up with a 20% downpayment. If 20% is an issue, it delays your entry into the market. Those delays commonly run three to five years. That delay can cost you significantly because forecasters expect market rates to rise in the near future. Then there are prices of homes in Alberta. Opportunity is knocking today because that very affordable price of real estate is set to tip the scales to the upper end, very soon. If you wait to hit the 20% mark, any benefit you gained from a lower principal may be lost due to a bigger buy-in required.
What about needing at least 5%? While technically required, it need not be what it seems. For instance, programs exist where you can account for that 5% via an RRSP contribution which may be applied. In some scenarios, those with an impeccable credit score and proven income (to cover the prospective mortgage) can score a lower downpayment. Again, the viability of this comes down to working with a broker that has access to programs and financial products that can make it work for you.
4. Pre-Qualification / Pre-Approval Leads Directly to a Loan
Pre-qualification is where you simply provide a prospective lender with your overall financial picture, including your debt, income and assets. No facts (income statements, etc.) are checked. After the evaluation, the lender will provide you with a mortgage amount that you qualify for. It can be done online or over the phone. Pre-qualification gets your foot in the door.
Pre-approval is more involved. This is where you provide the lender with the necessary documentation to perform a comprehensive check on your current and historical financial background and credit score. After this accounting you receive a more clear picture of what sort of mortgage you can afford. Pre-approval gets you a seat at the table, but you don’t get to eat, not yet.
Pre-approval is a conditional commitment. Things can happen between now and then. Your credit score can change with one wrong move. There is also a lot of financial paperwork to follow-up that may uncover concerns for lenders. This is where (once again) bringing in a mortgage broker helps. A truly fine broker will be there from pre-qualification to pre-approval to the moment you seal the deal on your mortgage. Don’t take anything for granted in the process. A lot can go wrong when you go at it on your own, but so much can go right when you have support.
Contact Dan Heon, expert mortgage broker and myth-debunker, serving prospective homeowners/investors in Calgary, Edmonton and the surrounding area.