In light of the new market realities and tightening of credit underwriting standards by both lenders and mortgage default insurers as of late, keep in mind that now – more than ever – it’s important to be careful what you do between the time your mortgage is approved and when it funds. Most people assume that when their mortgage has been approved, it’s a done deal even if it’s months prior to their closing and that’s simply not the case.
A few mortgage lenders and insurers have been doing something lately that they have not done in a long time – pulling new credit bureaus prior to funding, especially if there is a long period between the time of your approval and when the mortgage actually funds.
Following are eight tips to keep in mind between your mortgage approval and funding dates:
1. Don’t buy a new car or trade-up to a more expensive lease.
2. Don’t quit your job or change jobs. Even if it’s a better-paying job, you still are likely to be on a probationary period. If in doubt, call your mortgage professional and they can let you know if this may jeopardize your approval.
3. Don’t change industries, decide to become self-employed or accept a contract position even if it’s within the same industry. Delay the start of your new job, self-employment or contract status until after the funding date of your mortgage.
4. Don’t transfer large sums of money between bank accounts. Lenders get especially skittish about this one because it looks like you’re borrowing money. Be ready to document cash transactions or money movements.
5. Don’t forget to pay your bills, even ones that you’re disputing. This can be a real deal-breaker. If the lender pulls your credit bureau prior to closing and sees a collection or a delinquent account, the best you can hope for is that they make you pay off the account before they will fund. You don’t want to have to scramble to pay off a debt at the last minute!
6. Don’t open new credit cards. Again, just wait until after your funding date.
7. Don’t accept a cash gift without properly documenting it – even if this is from proceeds of a wedding. If you have a bunch of cash to deposit before your funding date, give your mortgage professional a call before you deposit it.
8. Don’t buy furniture on the “Do not pay for XX years plan” until after funding. Even though you don’t have to pay now, it will still be reported on your credit bureau, and will become an issue – especially if your approval was tight to begin with.
While you may not risk losing your mortgage approval because you have broken one of these rules, it’s always best to talk to your mortgage professional before doing any of the above just to make sure!
Monday, January 10, 2011
Tuesday, December 21, 2010
The Trouble with Debit Cards
If you’re like just about everyone around you and I’m sure you are, over the last 4-6 weeks you’ve been buying things for an endless list of people and trying to get it done as quickly as possible. More importantly, when you’ve found that perfect thing and taken it to the counter to pay for it, you’ve handed over a piece of plastic to cover the cost. We live in a society of instant gratification and the need for convenience. Unlike our parents or grandparents – who saved up for larger purchases – we are often tempted to splurge on bigger-ticket items simply because we have a debit card in hand when we head out “window shopping”.
And aside from overspending thanks to the advent of debit cards, consumers are also more likely to dip into overdraft, which ends up costing more thanks to fees and interest that banks charge whenever you spend more than you have in your account.
Basically, a debit card works like a cheque. The only difference is that every time you use it, you’re immediately taking money out of your account. That’s why when you overdraw it’s like bouncing a cheque – only worse because, unlike cheques, you probably don’t keep a record of every debit card purchase you make.
You may even make a bunch of small purchases before you realize you’ve spent more than you have. So before you pay for that coffee or lunch purchase with your debit card, make sure you have enough money in your account to cover it.
Revert to using cash for daily expenses...cash controls spending, plain and simple. Using cash to pay for everyday purchases such as coffee, transit, lunch and magazines alerts you to the idea that you’re actually spending real money. You just don’t get the same cautionary sense when you haul out plastic, be it a debit or credit card.
There’s a distinct cognitive event that happens when you handle money – it’s called awareness. Over the counter goes the five dollar bill and back comes a loonie, a dime, two nickels and four pennies.
Did you just add up the change above to determine how much money you have left? Did you think about what that purchase could have been? You see, you are much more conscious of this imaginary purchase than if you had paid with plastic.
Now, add in the awareness of the bills left in your wallet and you become attuned to your temporary wealth, or lack thereof. At the end of the day, what encourages or cautions many consumers about spending is knowing where you stand from a financial perspective. That’s why cash can help control spending. Using cash to pay for everyday purchases alerts you to the idea that you’re actually spending real money.
By allotting yourself a weekly cash allowance for entertainment and everyday expenses – such as that daily morning coffee or weekly movie – you are building a budget around what you can spend on these purchases. And once the money in your wallet has been spent, you have to ensure you fight the urge to withdraw more cash or resort back to using your debit card.
Be realistic about what you typically spend on these items in a week. If you routinely eat out for lunch or stop at Tim Hortons for coffee, count that as well. If you think you’re spending too much on these items, you can then decide to find a less expensive alternative, such as brown-bagging your lunch or making your own coffee.
Let’s say, for instance, that you start the week off with $50 in your wallet and you began to spend it on your purchases. You will see $50 turn into $40, $40 turn into $25, $25 turn into $15 and so on. Every time you look into your wallet, you will see what’s left over from your original $50 and be aware of how quickly your money is being spent. This alone can make you think twice before making a purchase.
Using cash instead of the convenience of debit and credit cards might seem like something out of the stone age but take a look at your parents and grandparents. They have likely never had large sums of debt they carried from month to month and have savings they should be proud of instead of embarrassed by.
And aside from overspending thanks to the advent of debit cards, consumers are also more likely to dip into overdraft, which ends up costing more thanks to fees and interest that banks charge whenever you spend more than you have in your account.
Basically, a debit card works like a cheque. The only difference is that every time you use it, you’re immediately taking money out of your account. That’s why when you overdraw it’s like bouncing a cheque – only worse because, unlike cheques, you probably don’t keep a record of every debit card purchase you make.
You may even make a bunch of small purchases before you realize you’ve spent more than you have. So before you pay for that coffee or lunch purchase with your debit card, make sure you have enough money in your account to cover it.
Revert to using cash for daily expenses...cash controls spending, plain and simple. Using cash to pay for everyday purchases such as coffee, transit, lunch and magazines alerts you to the idea that you’re actually spending real money. You just don’t get the same cautionary sense when you haul out plastic, be it a debit or credit card.
There’s a distinct cognitive event that happens when you handle money – it’s called awareness. Over the counter goes the five dollar bill and back comes a loonie, a dime, two nickels and four pennies.
Did you just add up the change above to determine how much money you have left? Did you think about what that purchase could have been? You see, you are much more conscious of this imaginary purchase than if you had paid with plastic.
Now, add in the awareness of the bills left in your wallet and you become attuned to your temporary wealth, or lack thereof. At the end of the day, what encourages or cautions many consumers about spending is knowing where you stand from a financial perspective. That’s why cash can help control spending. Using cash to pay for everyday purchases alerts you to the idea that you’re actually spending real money.
By allotting yourself a weekly cash allowance for entertainment and everyday expenses – such as that daily morning coffee or weekly movie – you are building a budget around what you can spend on these purchases. And once the money in your wallet has been spent, you have to ensure you fight the urge to withdraw more cash or resort back to using your debit card.
Be realistic about what you typically spend on these items in a week. If you routinely eat out for lunch or stop at Tim Hortons for coffee, count that as well. If you think you’re spending too much on these items, you can then decide to find a less expensive alternative, such as brown-bagging your lunch or making your own coffee.
Let’s say, for instance, that you start the week off with $50 in your wallet and you began to spend it on your purchases. You will see $50 turn into $40, $40 turn into $25, $25 turn into $15 and so on. Every time you look into your wallet, you will see what’s left over from your original $50 and be aware of how quickly your money is being spent. This alone can make you think twice before making a purchase.
Using cash instead of the convenience of debit and credit cards might seem like something out of the stone age but take a look at your parents and grandparents. They have likely never had large sums of debt they carried from month to month and have savings they should be proud of instead of embarrassed by.
Wednesday, December 8, 2010
Closing Costs – Often overlooked, always misunderstood
When buying a new home, closing costs are something everyone has to pay. Unfortunately, they often get overlooked and most homebuyers don’t understand what constitutes closing costs...maybe that’s why they get overlooked.
I think this has to do with lack of education and the fact that nobody really talks about what they are in detail, but rather just refers to them as “closing costs”. I remember when I bought my first house, the realtor didn’t talk about closing costs, the bank rep didn’t talk about closing costs and the lawyer didn’t talk about closing costs until a few days before the purchase was supposed to close and I was told I needed to produce several thousand dollars. What?! Now, of course I’m to blame as well since I didn’t seek out what costs needed to be covered and relied on the professionals I was dealing with to hold my hand through the process. Obviously that didn’t happen. I was naive, but most first-time homebuyers and some experienced homebuyers are too.
Fast forward 12+ years and you can understand why I highlight closing costs to clients at several points through the process. The last thing I want is for a client to be scrambling like I was a few days before closing, trying to cover their closing costs.
In reality, there is more to it than most would think. Here are some of the approximate costs that buyers should be prepared for:
- Legal fees of $1000-$1200 for the purchase with an additional $800-$1000 if they are also selling a home. This includes a title search, mortgage registration and discharge if applicable.
- $300 for a home inspection.
- $250 for an appraisal. In some cases lenders will require an appraisal to verify the market value of the property.
- PST on Insurance premium. If your mortgage is for more than 80% of the purchase price you will have to pay a default insurance premium, which is included in your mortgage. However, the PST on the premium is paid outside of the mortgage.
- Property tax to the vendor. If the vendor has pre-paid their property taxes for a portion of the year where you have ownership, you may be responsible to reimburse them for that portion.
- Land transfer tax. This is the biggie. There is an Ontario Land Transfer Tax and a Toronto Land Transfer Tax. Obviously buyers within Toronto are responsible for both and buyers outside Toronto are only responsible for the Ontario Tax. These taxes are tiered dependent upon the purchase price of the property. Land transfer taxes can add up. For example, the Land Transfer Tax for a $400,000 property within Toronto would be $8200 and $4475 outside of Toronto. A LTT calculator can be found here http://www.torontorealestateboard.com/LTT_splash/ltt_calculator.htm
Some of the above costs like the home inspection and appraisal would be paid for before the rest of the closing costs but I think they are worth noting since they are costs associated with the purchase that should be accounted for ahead of time.
You can see that closing costs can add up quickly. Most lenders use 1.5% of the purchase price as a ballpark estimate. Although this would give you an estimate of what to expect, I highly recommend doing a more accurate calculation. Knowing what your costs will be ahead of time will allow you to plan accordingly to have the money available or incorporate them into your mortgage if you can.
I think this has to do with lack of education and the fact that nobody really talks about what they are in detail, but rather just refers to them as “closing costs”. I remember when I bought my first house, the realtor didn’t talk about closing costs, the bank rep didn’t talk about closing costs and the lawyer didn’t talk about closing costs until a few days before the purchase was supposed to close and I was told I needed to produce several thousand dollars. What?! Now, of course I’m to blame as well since I didn’t seek out what costs needed to be covered and relied on the professionals I was dealing with to hold my hand through the process. Obviously that didn’t happen. I was naive, but most first-time homebuyers and some experienced homebuyers are too.
Fast forward 12+ years and you can understand why I highlight closing costs to clients at several points through the process. The last thing I want is for a client to be scrambling like I was a few days before closing, trying to cover their closing costs.
In reality, there is more to it than most would think. Here are some of the approximate costs that buyers should be prepared for:
- Legal fees of $1000-$1200 for the purchase with an additional $800-$1000 if they are also selling a home. This includes a title search, mortgage registration and discharge if applicable.
- $300 for a home inspection.
- $250 for an appraisal. In some cases lenders will require an appraisal to verify the market value of the property.
- PST on Insurance premium. If your mortgage is for more than 80% of the purchase price you will have to pay a default insurance premium, which is included in your mortgage. However, the PST on the premium is paid outside of the mortgage.
- Property tax to the vendor. If the vendor has pre-paid their property taxes for a portion of the year where you have ownership, you may be responsible to reimburse them for that portion.
- Land transfer tax. This is the biggie. There is an Ontario Land Transfer Tax and a Toronto Land Transfer Tax. Obviously buyers within Toronto are responsible for both and buyers outside Toronto are only responsible for the Ontario Tax. These taxes are tiered dependent upon the purchase price of the property. Land transfer taxes can add up. For example, the Land Transfer Tax for a $400,000 property within Toronto would be $8200 and $4475 outside of Toronto. A LTT calculator can be found here http://www.torontorealestateboard.com/LTT_splash/ltt_calculator.htm
Some of the above costs like the home inspection and appraisal would be paid for before the rest of the closing costs but I think they are worth noting since they are costs associated with the purchase that should be accounted for ahead of time.
You can see that closing costs can add up quickly. Most lenders use 1.5% of the purchase price as a ballpark estimate. Although this would give you an estimate of what to expect, I highly recommend doing a more accurate calculation. Knowing what your costs will be ahead of time will allow you to plan accordingly to have the money available or incorporate them into your mortgage if you can.
Wednesday, November 24, 2010
Mortgage Renewals – BEWARE OF BEING GOUGED!!!
This is something I posted earlier in the year that I think is always relevant and worth re-posting....
Did you know that 84% of all maturing mortgages are renewed with the same lender? 84%!! I find that staggering. Why, you ask? Well, did you also know that at least in the case of the banks, the renewal notices that get sent to you as your mortgage is maturing do not quote their best rates? Surprised...you shouldn’t be.
Why would people renew at a rate that’s not the best available? It’s just like when you walked into the bank to get your first mortgage and the quote you were given was not the best rate. It likely required you to negotiate like crazy to get a rate that still wasn’t the best available. I know, I know, it’s just so easy to sign the renewal notice and send it back and that’s it. Let me draw a comparison. Take a professional athlete who is coming to end of his contract and will be a free agent. Does he simply sign on the dotted line at the end of his contract for whatever the team is offering? Absolutely not!! He tests the free agent market and entertains offers from the open market to find out who the highest bidder will be so he can make as much money as possible. More importantly, he gets an agent to do it for him. The same goes for the world of maturing mortgages. There is a very competitive lender market out there that desperately wants your business and is willing to fight for it. Consumers should be taking advantage of their free agency and that open market to get themselves the best deal possible and save money. And just like in the sporting example, there are agents who are willing to do the shopping for you to get you the best deal. The difference is our services are free to our clients whereas a sports agent charges a hefty fee to their clients.
Most lenders send out their renewal notices 30 days before your renewal. This is by design. The less notice they give you, the less likely you are to switch to a different lender. Don't just sit back and wait for their notice to come in the mail before starting to look at the market. You can get a rate hold up to 120 days out from your renewal. That will protect you against possible rate increases in those 120days and if the rate goes down in that time, you get the lower rate. I always recommend clients get their approval and rate hold as early as possible. Then when their renewal notice comes in the mail they have a choice and the next steps are quick and easy. Getting the "most" out of your mortgage takes active management, not complacency. Over the life of your mortgage you stand to save thousands of dollars by being proactive, instead of reactive.
One of the myths about moving your mortgage to a different lender is that there are huge fees to do it. Although on closed mortgages there are penalties if you want to switch mid-term, if you are at your renewal, there are no big fees or penalties to switch to a different lender. Most lenders will charge $200-$250 and call it an Administrative Charge or Discharge fee but that fee can be included in your new mortgage and would likely pale in comparison to what you would save in interest charges if you change lenders.
If you have a mortgage coming to the end of its term in the upcoming months, give me a call so I can ensure that you’re getting the best deal possible. Just think...you don’t need to do any shopping, negotiating or accommodating the bank’s hours. I’m one phone call away, will do the shopping for you and come to you whenever it fits into your schedule.
At the very least, keep yourself informed so you have as much leverage as possible if you decide to take on the challenge of negotiating with your bank.
peter@theabbatangelogroup.com
647-203-5440
Did you know that 84% of all maturing mortgages are renewed with the same lender? 84%!! I find that staggering. Why, you ask? Well, did you also know that at least in the case of the banks, the renewal notices that get sent to you as your mortgage is maturing do not quote their best rates? Surprised...you shouldn’t be.
Why would people renew at a rate that’s not the best available? It’s just like when you walked into the bank to get your first mortgage and the quote you were given was not the best rate. It likely required you to negotiate like crazy to get a rate that still wasn’t the best available. I know, I know, it’s just so easy to sign the renewal notice and send it back and that’s it. Let me draw a comparison. Take a professional athlete who is coming to end of his contract and will be a free agent. Does he simply sign on the dotted line at the end of his contract for whatever the team is offering? Absolutely not!! He tests the free agent market and entertains offers from the open market to find out who the highest bidder will be so he can make as much money as possible. More importantly, he gets an agent to do it for him. The same goes for the world of maturing mortgages. There is a very competitive lender market out there that desperately wants your business and is willing to fight for it. Consumers should be taking advantage of their free agency and that open market to get themselves the best deal possible and save money. And just like in the sporting example, there are agents who are willing to do the shopping for you to get you the best deal. The difference is our services are free to our clients whereas a sports agent charges a hefty fee to their clients.
Most lenders send out their renewal notices 30 days before your renewal. This is by design. The less notice they give you, the less likely you are to switch to a different lender. Don't just sit back and wait for their notice to come in the mail before starting to look at the market. You can get a rate hold up to 120 days out from your renewal. That will protect you against possible rate increases in those 120days and if the rate goes down in that time, you get the lower rate. I always recommend clients get their approval and rate hold as early as possible. Then when their renewal notice comes in the mail they have a choice and the next steps are quick and easy. Getting the "most" out of your mortgage takes active management, not complacency. Over the life of your mortgage you stand to save thousands of dollars by being proactive, instead of reactive.
One of the myths about moving your mortgage to a different lender is that there are huge fees to do it. Although on closed mortgages there are penalties if you want to switch mid-term, if you are at your renewal, there are no big fees or penalties to switch to a different lender. Most lenders will charge $200-$250 and call it an Administrative Charge or Discharge fee but that fee can be included in your new mortgage and would likely pale in comparison to what you would save in interest charges if you change lenders.
If you have a mortgage coming to the end of its term in the upcoming months, give me a call so I can ensure that you’re getting the best deal possible. Just think...you don’t need to do any shopping, negotiating or accommodating the bank’s hours. I’m one phone call away, will do the shopping for you and come to you whenever it fits into your schedule.
At the very least, keep yourself informed so you have as much leverage as possible if you decide to take on the challenge of negotiating with your bank.
peter@theabbatangelogroup.com
647-203-5440
Sunday, November 7, 2010
Retiring with a Mortgage
Last week there was an article in the Toronto Star that discussed the amount of baby boomers who are putting off retirement or heading into retirement, still having not paid off their mortgage. With 35 year amortizations becoming the norm, most borrowers now, at least at the beginning of their mortgage, are looking at an end to their mortgage that is tickling the age, if not right into what they deem to be the age they want to retire. This isn’t necessarily a bad thing and may in fact end up being the reality. However, this doesn’t need to be the reality. Most mortgages come with flexible pre-payment plans. If you don’t want to be part of the percentage putting off retirement or still with a mortgage when you are retired, take advantage of your pre-payment options. It’s not difficult to calculate the effect that extra payments will have on the life of your mortgage. Talk to a professional, if you haven’t already, to develop your plan to get mortgage-free sooner, rather than later.
Below is the article that appeared in the Toronto Star on October 28, 2010:
Ontario baby boomers are looking to move to smaller homes in retirement. But first they have to pay off the mortgage.
A poll by TD Canada Trust released Thursday says 86 per cent of boomers want a smaller home when they retire. However, even though they say it is important to pay off the mortgage before they retire, it turns out less than half, or 43 per cent have actually done so.
One quarter of those boomers have paid off less than 40 per cent of their mortgage, meaning they have a ways to go before thinking about retirement.
About half says moving to a smaller home will help them save money, while more than a third says the new home, although smaller, will have more luxurious features.
“Moving to a smaller home can allow you to free up assets to put towards your retirement savings or enjoy in other ways,” said Farhaneh Haque, regional sales manager for TD Canada Trust.
Baby boomers are the post war generation born between 1946 to 1964,with the first wave approaching their retirement years. But an uncertain economy and falling stock markets over the last several years have meant that some boomers have had to hold back retirement or refinance their homes to stay afloat.
For their next property, boomers aren’t all rushing to the condo market either. More than half, or 61 per cent say they plan to buy detached. Condos came in second at 24 per cent. Top reasons for a detached house is that boomers still want a back yard and garden and really hate paying condo fees. Condos are popular because they require less maintenance and offer better security, and have amenities such as a gym or pool.
Meanwhile, another third of boomers are planning to buy a retirement property south of the border.
A quarter say “opportunities created by the depressed real estate market have sparked their interest,” according to the poll.
About ten per cent already own a vacation property, but another 12 per cent plan to buy on retirement.
Below is the article that appeared in the Toronto Star on October 28, 2010:
Ontario baby boomers are looking to move to smaller homes in retirement. But first they have to pay off the mortgage.
A poll by TD Canada Trust released Thursday says 86 per cent of boomers want a smaller home when they retire. However, even though they say it is important to pay off the mortgage before they retire, it turns out less than half, or 43 per cent have actually done so.
One quarter of those boomers have paid off less than 40 per cent of their mortgage, meaning they have a ways to go before thinking about retirement.
About half says moving to a smaller home will help them save money, while more than a third says the new home, although smaller, will have more luxurious features.
“Moving to a smaller home can allow you to free up assets to put towards your retirement savings or enjoy in other ways,” said Farhaneh Haque, regional sales manager for TD Canada Trust.
Baby boomers are the post war generation born between 1946 to 1964,with the first wave approaching their retirement years. But an uncertain economy and falling stock markets over the last several years have meant that some boomers have had to hold back retirement or refinance their homes to stay afloat.
For their next property, boomers aren’t all rushing to the condo market either. More than half, or 61 per cent say they plan to buy detached. Condos came in second at 24 per cent. Top reasons for a detached house is that boomers still want a back yard and garden and really hate paying condo fees. Condos are popular because they require less maintenance and offer better security, and have amenities such as a gym or pool.
Meanwhile, another third of boomers are planning to buy a retirement property south of the border.
A quarter say “opportunities created by the depressed real estate market have sparked their interest,” according to the poll.
About ten per cent already own a vacation property, but another 12 per cent plan to buy on retirement.
Monday, October 25, 2010
“Interest”-ing times ahead...
There was a change in the Canadian mortgage industry last week. It was a quiet one, at least from a consumer standpoint, but I believe it will have a big impact down the road. The change, in a nutshell, is that TD Canada Trust has changed the way they register mortgages.
Up until October 18, TD registered their charges the same way other institutions did using a “conventional charge” for the amount of your mortgage. Registering your mortgage is something that you pay your real estate lawyer to do. Under TD’s new process, they are using what is called a collateral charge that is registered at up to 125% of the value of your home. The reason behind the change, according to TD, is to give homeowners easier, cheaper access to the equity built up in their homes.
It is very important to understand that this change does not mean borrowers can access 125% of the value of their homes. The same policies remain in effect, that limit all borrowers to a maximum of 95% LTV for a purchase and 90% LTV for a refinance. What it does mean, is as the value of a borrower’s home increases, if they refinance their mortgage, it will not have to be re-registered, avoiding legal fees. In the case of a refinance, clients will still have to adhere to the 90% maximum LTV policy and re-qualify for the desired amount. For example, somebody buying a house for $300,000 can borrow up to $285,000 (95% LTV) and the collateral charge would be registered for $375,000. If after 3 years, the property value has gone up to $400,000, the borrowers would be able to refinance their mortgage up to $360,000 (90% LTV) and not have to incur legal charges, provided the borrower qualifies.
The ONLY benefit I see for consumers is that they are able to avoid some legal fees, which would make just about anybody happy unless of course you’re a real estate lawyer. The drawback however, is far greater in my opinion and that is a lack of choice. What I mean by this, is there is some limitation at the time of that refinance or a renewal at the end of a term, if a client wants to switch to another lender. You see, other lenders will not accept a TD collateral charge on assignment (if you switch lenders at renewal or mid-term for a better rate), therefore switching lenders either at renewal or refinance will mean incurring legal fees. So, if you’ve got a TD collateral charge mortgage and want to refinance or have a renewal coming up, your choices are to stay with TD or pay legal fees to switch lenders.
The prohibitive aspect I can already see is the way in which it will be positioned. Upfront, I can hear clients being told that registering to 125% means “easier access to equity”. It doesn’t. The property still has to have increased in value and clients still have to qualify for the amount requested, no different than if your mortgage is not a collateral charge. The ONLY difference is that IF you refinance you avoid legal fees...but you also pay whatever rate TD is charging, no opportunity to shop for a better rate. At refinance or renewal, I can hear clients being warned about the fees. As it is, I hear it all the time when clients say their bank told them they would have to pay a “big fee” to do this or a “big fee” to do that without ever quantifying what the fee is or fully analyzing the options. I would fully expect that clients will be told they will incur a “big fee” to go to another lender. In reality, legal fees on average for a refinance are $600-$1000. I’ve even had a client whose lawyer charges $400 for a refinance. That’s the “big fee” you’ll be made to feel scared of. I’m not saying $400 or $600 or $1000 isn’t a lot of money. It is, but it may not be as much as the added interest you end up paying. The real downside for people who aren’t fully aware of their options and are successfully scared of the “big fee” is they will end up paying whatever rate TD is charging, without shopping the market. This is where analyzing your options comes into play. If TD’s 5-year fixed rate is 3.89% but you can get 3.59% at a different lender, it may be worth paying the legal fees to switch lenders. It may not, but at least doing the analysis will help you make an informed decision, rather than being scared of the “big fee” and paying whatever rate is being charged. Either do it yourself or have a professional do it for you, preferably someone without bias as to which lender your mortgage is with.
As always, my opinion is that education is paramount. Understand the conditions of your mortgage and what it is you’re signing. If you don’t understand something, ask for clarification. If you still don’t understand, ask again or ask somebody else. If you feel you’re not getting straight answers, you’re not talking to the right person. And for the love of God, don’t listen to things like “big fees” or “lots of interest” without getting it quantified.
Up until October 18, TD registered their charges the same way other institutions did using a “conventional charge” for the amount of your mortgage. Registering your mortgage is something that you pay your real estate lawyer to do. Under TD’s new process, they are using what is called a collateral charge that is registered at up to 125% of the value of your home. The reason behind the change, according to TD, is to give homeowners easier, cheaper access to the equity built up in their homes.
It is very important to understand that this change does not mean borrowers can access 125% of the value of their homes. The same policies remain in effect, that limit all borrowers to a maximum of 95% LTV for a purchase and 90% LTV for a refinance. What it does mean, is as the value of a borrower’s home increases, if they refinance their mortgage, it will not have to be re-registered, avoiding legal fees. In the case of a refinance, clients will still have to adhere to the 90% maximum LTV policy and re-qualify for the desired amount. For example, somebody buying a house for $300,000 can borrow up to $285,000 (95% LTV) and the collateral charge would be registered for $375,000. If after 3 years, the property value has gone up to $400,000, the borrowers would be able to refinance their mortgage up to $360,000 (90% LTV) and not have to incur legal charges, provided the borrower qualifies.
The ONLY benefit I see for consumers is that they are able to avoid some legal fees, which would make just about anybody happy unless of course you’re a real estate lawyer. The drawback however, is far greater in my opinion and that is a lack of choice. What I mean by this, is there is some limitation at the time of that refinance or a renewal at the end of a term, if a client wants to switch to another lender. You see, other lenders will not accept a TD collateral charge on assignment (if you switch lenders at renewal or mid-term for a better rate), therefore switching lenders either at renewal or refinance will mean incurring legal fees. So, if you’ve got a TD collateral charge mortgage and want to refinance or have a renewal coming up, your choices are to stay with TD or pay legal fees to switch lenders.
The prohibitive aspect I can already see is the way in which it will be positioned. Upfront, I can hear clients being told that registering to 125% means “easier access to equity”. It doesn’t. The property still has to have increased in value and clients still have to qualify for the amount requested, no different than if your mortgage is not a collateral charge. The ONLY difference is that IF you refinance you avoid legal fees...but you also pay whatever rate TD is charging, no opportunity to shop for a better rate. At refinance or renewal, I can hear clients being warned about the fees. As it is, I hear it all the time when clients say their bank told them they would have to pay a “big fee” to do this or a “big fee” to do that without ever quantifying what the fee is or fully analyzing the options. I would fully expect that clients will be told they will incur a “big fee” to go to another lender. In reality, legal fees on average for a refinance are $600-$1000. I’ve even had a client whose lawyer charges $400 for a refinance. That’s the “big fee” you’ll be made to feel scared of. I’m not saying $400 or $600 or $1000 isn’t a lot of money. It is, but it may not be as much as the added interest you end up paying. The real downside for people who aren’t fully aware of their options and are successfully scared of the “big fee” is they will end up paying whatever rate TD is charging, without shopping the market. This is where analyzing your options comes into play. If TD’s 5-year fixed rate is 3.89% but you can get 3.59% at a different lender, it may be worth paying the legal fees to switch lenders. It may not, but at least doing the analysis will help you make an informed decision, rather than being scared of the “big fee” and paying whatever rate is being charged. Either do it yourself or have a professional do it for you, preferably someone without bias as to which lender your mortgage is with.
As always, my opinion is that education is paramount. Understand the conditions of your mortgage and what it is you’re signing. If you don’t understand something, ask for clarification. If you still don’t understand, ask again or ask somebody else. If you feel you’re not getting straight answers, you’re not talking to the right person. And for the love of God, don’t listen to things like “big fees” or “lots of interest” without getting it quantified.
Tuesday, October 12, 2010
Looking Beyond Mortgage Rates
It’s easy to get caught up in the idea that comparing mortgage rates will guarantee you get the best bang for your mortgage buck, especially when rates are at historic lows. While this may be true for particular situations, there are many scenarios where this strategy is not effective. Following are three reasons why it doesn’t always pay to make a decision based solely on rates.
Reason #1
Your long-term plan and risk tolerance should determine which mortgage product is right for you. This product may or may not have the lowest rate.
For instance, there are cases where lenders will offer lower rates for insured mortgages. With insured mortgages, however, you’re charged an insurance premium, which is usually added to the mortgage amount. But if you’re not planning on keeping the property for a long enough time to offset that cost, it may be better to take an uninsured mortgage with a slightly higher rate. The cost difference you will pay with the higher interest rate may still be less than what you may pay in insurance premiums.
As another example, if you prefer to budget for a consistent payment and can’t handle rate fluctuations, it may be better to go with a higher fixed-rate mortgage. If you think current rates are low enough and you will be living in your property for at least five years, it may be wise to also opt for a mortgage with a longer term.
Reason #2
One of the biggest mistakes people make when merely comparing mortgage rates is failing to consider important factors such as prepayment options to help pay off the mortgage faster, whether secondary financing options are allowed, early payout penalties, or what fees are involved.
It’s not enough to simply compare mortgage rates because you have to know what “clauses” are contained within the mortgage deal. There are also a lot of bait and switches out there where rates will be advertised but the fine print details all the potential reasons you may not get that rate. When looking at rates, make sure you ask what rate “you” will get, instead of what the best rate is…they may not be the same.
Reason #3
Lenders can change their rates at any time. As such, if you’re shopping for rates with one lender and then approach another that gives you a lower rate, it’s quite possible that the first lender has also dropped its rates. This is why it’s important to get pre-approved with a lender once you a mortgage that fits your needs. In some cases, you can secure your rate and conditions for up to 120 days.
These are just three reasons why it’s not enough to merely compare mortgage rates. The mortgage rate you may qualify for is also highly dependent on your credit score among other things. In order to get the best mortgage deals, you need to have solid credit.
It’s prudent for everyone to do their rate homework. The better informed you are, the more likely you will make a good decision. Just ensure it’s the whole product and it’s features that are best suited to you and not just the rate.
Reason #1
Your long-term plan and risk tolerance should determine which mortgage product is right for you. This product may or may not have the lowest rate.
For instance, there are cases where lenders will offer lower rates for insured mortgages. With insured mortgages, however, you’re charged an insurance premium, which is usually added to the mortgage amount. But if you’re not planning on keeping the property for a long enough time to offset that cost, it may be better to take an uninsured mortgage with a slightly higher rate. The cost difference you will pay with the higher interest rate may still be less than what you may pay in insurance premiums.
As another example, if you prefer to budget for a consistent payment and can’t handle rate fluctuations, it may be better to go with a higher fixed-rate mortgage. If you think current rates are low enough and you will be living in your property for at least five years, it may be wise to also opt for a mortgage with a longer term.
Reason #2
One of the biggest mistakes people make when merely comparing mortgage rates is failing to consider important factors such as prepayment options to help pay off the mortgage faster, whether secondary financing options are allowed, early payout penalties, or what fees are involved.
It’s not enough to simply compare mortgage rates because you have to know what “clauses” are contained within the mortgage deal. There are also a lot of bait and switches out there where rates will be advertised but the fine print details all the potential reasons you may not get that rate. When looking at rates, make sure you ask what rate “you” will get, instead of what the best rate is…they may not be the same.
Reason #3
Lenders can change their rates at any time. As such, if you’re shopping for rates with one lender and then approach another that gives you a lower rate, it’s quite possible that the first lender has also dropped its rates. This is why it’s important to get pre-approved with a lender once you a mortgage that fits your needs. In some cases, you can secure your rate and conditions for up to 120 days.
These are just three reasons why it’s not enough to merely compare mortgage rates. The mortgage rate you may qualify for is also highly dependent on your credit score among other things. In order to get the best mortgage deals, you need to have solid credit.
It’s prudent for everyone to do their rate homework. The better informed you are, the more likely you will make a good decision. Just ensure it’s the whole product and it’s features that are best suited to you and not just the rate.
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