When shopping for a mortgage, the first thing borrowers looks for (and sometimes the only thing) is the best mortgage rate. While mortgage rate is undeniably the single most important factor in choosing a mortgage, other factors could overwhelmingly make a low rate mortgage a bad choice. Some of you may be thinking, “What other factors?”
Other factors will rank in priority according to an individual’s circumstances, but they’ll affect one’s overall borrowing costs over the life of their mortgage. Here are the most important mortgage factors to consider:
- Length of Term
- Rate Type (Fixed, Variable or Open)
- Service Levels
- Pre-payment Abilities
- “Fine Print” clauses
A competitive mortgage rate is the minimum requirement for consideration, but a rate discount of 0.25% to 0.50% cold easily cost you more in the long run. A more detailed look at your individual circumstances will help you determine your ideal mortgage product. Here’s how the other factors come into play.
Length of Term
With record low mortgage rates its’ clear that a 1 year term is a poor choice, but how long should one lock in and how much more should one pay for the additional peace of mind? These are rhetorical questions that require individual attention, but 7 and 10 year terms are gaining in popularity.
With fixed and variable rate mortgages being offered at similar mortgage rates it makes little sense to go variable even if you get 0.25% to 0.50% lower on your mortgage rate. With mortgage rates having nowhere to go but up, it makes sense to get a fixed mortgage rate unless you get a substantial discount (ie 1%+)on the variable mortgage rate. Open mortgages are almost never worthwhile. The open mortgage rates are so high that you’d be better taking a closed term and paying the penalty.
Some borrowers may be willing to accept nightmare service levels to save a little money, but beware the consequences. Sloppy lenders have been known to come back at the last minute with a policy reasons to decline the mortgage. The cost of defaulting on a purchase agreement can be substantial, and if rates have risen, then switching to another lender at the last minute could give you a substantially higher mortgage rate. Sage advice would be to pick a trusted mortgage broker or lender first and then leave it to them to get you the best rate.
These are standard fare for 99% of the mortgages out there, but if you see a mortgage rate that’s just too good to be true then tread carefully. No frills mortgages sometimes cut these back and sometimes eliminate them altogether. Having a reduced pre-payment privilege is probably not an issue for most, but no privilege payments will surely cost you more in the long run.
These same no frills mortgage rates often have other fine print clauses that need to be studied. A common one is that the lender won’t let you leave their institution unless you produce a bona fide sale agreement to a non-arm’s length purchaser. This essentially means you have to go back to them for any future mortgage needs and will not be in a position to negotiate any mortgage terms. Save a little now to pay a lot tomorrow will bite you in the butt so steer clear of the fine print even if the mortgage rate appears lower.