You’ve spent weeks looking at homes; making lists of must haves and nice to haves; researching values, and negotiating the price. Finally, you find your new home! Now, all you need to do is call your current mortgage company and they’ll take care of the mortgage. Hold it! Don’t forget that mortgage lenders will always look out for themselves first. They are selling a product and are eager to earn your business, but if they can make a little more money in the transaction they will. If you were willing to spend time going back and forth over a few thousand dollars to negotiate the purchase price, then you should make sure you aren’t just handing that money over to your bank. Even a small 0.25% difference in your interest rate can mean a difference of $5,000.00 over your new 5 year term. But don’t be fooled be the rate alone. There are other factors that can cost you thousands over the life of your mortgage. Here’s what to consider when shopping for your next mortgage.
1) Take Time to Compare
This one is self-evident. Make sure you take the time to compare several mortgage lenders. Either do the research yourself or consider engaging a mortgage broker to do the work for you. A good mortgage broker won’t charge you for this service.
2) Pre-Payment Privileges
Compare pre-payment privileges. Beware mortgages that have restrictive pre-payment privileges in exchange for a below market interest rate. This could cost you additional interest expenses down the road when you are in a better position to reduce your debt faster. You want to pay less interest over the life of your mortgage, not just in the first few years.
3) Beware Captive Mortgages
Make sure that the mortgage isn’t captive to the lender. Some mortgages require that any future refinances be made with the existing lender and they won’t let you pay-out or move your mortgage to another lender. Once captive, you lose all ability to negotiate terms.
4) Conversion Options
Variable rate mortgages are a popular option for many purchasers. They offer lower rates than their fixed rate counter-part and are not subject to the dreaded IRD penalty. They also allow you to convert to a fixed rate mortgage. The pitfall is that you can only convert with your mortgage lender and are in weak position to negotiate the best fixed rate. If you decide on a variable rate mortgage, make sure your mortgage company confirms they will offer you their best fixed rate on conversion.
5) Portable and Assumable
Make sure the mortgage is portable and assumable. If you decide to move again before the term of your mortgage ends you may want to hang onto your current interest rate. If rates go up then you’ll have the option of bringing that low rate with you to your new home or the ability to offer it to the person buying your house (in exchange for a higher sale price). Most mortgages include this as one of their standard terms, so beware of mortgages that lack these features.
It’s all about keeping your negotiated dollars in your pocket and not passing them on to your mortgage lender. It’s more than just about the rate. The savings will come over the life of your well negotiated mortgage with a low rate, generous pre-payment privileges, and flexible terms that keep you in control.