The process of applying for and securing a mortgage can be confusing for many. It’s not something people do everyday and, simply put, there are several terms and conditions to read though — many of which contain phrases and words that are not common in everyday use.
Even using a mortgage calculator or working out how to find the best mortgage rates can take time and effort.
So while it’s always best to consult with a mortgage professional to avoid making mistakes with your mortgage, we’ve listed some things to look out for that may end up costing you extra money down the line.
Adjustable Mortgage Rates
With adjustable mortgage rates (“ARM”), the initial interest rate agreed at the outset of the mortgage is fixed for a period of time — but is then reset at yearly or even monthly intervals. The applicable interest rate is calculated based on an agreed benchmark or index, plus an additional spread called an “ARM margin”.
An adjustable rate mortgage transfers all risks from the lender to the person taking the mortgage, as it’s almost certain that the rate from the initially agreed interest rate will rise in the future. Conversely, a fixed rate mortgage is just that: the interest rate is fixed for the term of the loan, whether it be 20 or 30 years.
A so-called “liar loan” refers to those mortgages which require little or no documentation in order to be approved. They rely only on credit scores or ratings or, history relating to payments about previous mortgages, etc.
There have been/are certain low-documentation loan programs, such as stated income/stated asset (SISA) loans, where income and assets are noted on the loan application forms but not verified. However, issues tended to arise during any real estate boom, where applicants started to abuse the loans process.
In order to be approved for higher loans, people began lying about their incomes and assets (hence “liar loans”). In addition, some mortgage brokers and loan officers were happy to gain their commissions and not follow the appropriate due diligence process.
No Down-Payment Mortgages
With a no-down-payment mortgage, both first-time home and repeat home buyers can purchase property with no deposit or down payment at closing. However, standard closing costs still have to be paid. There are some government backed schemes such as the FHA loan, HomeReady mortgage, or the Conventional 97 loan, which are for targeted lower income buyers. These offer low down payment options with a little as 3% required.
However, with a no-down payment loan, interest rates are usually higher. This makes monthly mortgage payments higher and you will pay more back over time.
Longer Amortisation Periods
A longer amortisation period of say, 30 years, may make monthly payments more affordable. However, at the same time, it will increase the total amount to be paid back to the lender over the life of the loan. On the contrary, a shorter amortisation period results in higher regular payments — but the loan is paid off quicker.
Choosing the period over which a mortgage should be paid off is trade-off between lower monthly payments vs. the lower overall cost.
Reverse mortgages are sometimes called “equity release mortgages” and are usually taken out by people over 60 who have accumulated equity in a property as it has risen in value over the years. In essence, you take a loan from your mortgage provider against the equity in your home. This is converted into a single or regular tax-free payment.
Most reverse mortgages are federally insured, but the loan balance increases over time as interest on the loan and fees accumulate. This means that, as home equity is used up, there will be less available to leave to your heirs — who will then have to deduct the outstanding loan before they receive their inheritance.
Contact Axiom Mortgage Solutions
At Axiom Mortgage Solutions, we have long-standing experience in advising clients about mortgages and helping them avoid costly mistakes.
If you require assistance with your mortgage needs, we’re more than happy to help. To make an appointment with our trusted team, call us at our Tecumseh location at 519‑735‑1440, our Leamington location at 519‑326‑4978 or drop us a line on our convenient contact form.