Knowing what your options are and how to implement them can save you thousands on unwanted interest costs.
Buying a home is an exciting time, especially if you are a first time home buyer.
Being that the amount of a home will be very high, borrowing funds by taking out a mortgage is the road more often traveled. You may know that a down payment of at least 5-10% is required most of the time. The down payment made has some bearing on the total mortgage amount, and therefore the interest costs and payments, but may also lower the interest rate given to you by the lender. Typically people obtain mortgages from one of the main banks like TD or BMO. These are 1st rate lenders and usually have the lowest interest rates available. Second rate lenders are credit unions with rates that are historically higher than the banks but less than 3rd rate lenders, who are private lenders. This is not always the case however, it is advised to shop around for the best interest rates and terms before making a commitment of this magnitude. Research the market and analyze what the overall rates are to determine whether or not you are being offered an acceptable rate. Having a higher down payment may be more difficult for some so trying to land in the low-risk category is an alternative that may be more achievable.
Once you have found your lender and have been approved it is time to build your mortgage plan. There are many ways to build a payment plan for a mortgage. Amortization is the amount of years you are planning to pay back the loan, this is usually 25-30 years for a home mortgage, with renewal every 3-5 or 10 years. The shorter the amortization, the shorter time the interest can affect the principal which means savings to you. Before deciding on the renewal period, thorough market analysis is recommended to predict what the interest rates will be doing in the future. You don’t want to lock in for 10 years when market rates are being foreseen to drop in 3 years as you’ll end up paying more.
One percent of $100,000 is $1,000, compounded and multiplied by the duration. This number can get very large very quickly, as you probably noticed in the recent past, 1% is a massive change to those with mortgages with high dollar amounts. A way that this can be thwarted is with a fixed term rate, again based on proper market analysis. A fixed term rate means regardless of what changes the Bank of Canada does to the prime rate, your rate will not change. The other option for a rate plan is a variable rate, which follows the market trend.
The amortization period is primarily based on the payments you are able to make for the payment period planned. There are different payment schedules to choose from that have varying effects on the total interest of your loan. A monthly mortgage plan will obviously have 12 payments over the year. This is easier to remember but has the least effect on the interest. A better option is either bi-weekly or rapid bi-weekly. As payments are made, some of the payment is put toward the principal, whereas most of the payment goes toward the interest.
This is the case for the beginning, until the interest has been paid off first. Each payment makes a lesser principal and therefore will have lesser interest. In short, paying more often equals less interest. The best way to lower the total interest is to make extra payments, large or small, whatever your budget will allow. All extra payments made are deducted from the total principal and reduce the total interest as a result. Be wary of the rules though, paying mortgages down faster has a limit. If the limit is surpassed, a penalty charge can be invoked.
There are many factors that can save you thousands of dollars if properly used and implicated. Don’t hesitate to contact our team of experts here at Freeway Group. We will ensure you understand how to utilize these options to benefit your best.
