A mortgage is a type of loan used to either refinance a home or buy property. As for the interest rate that you will pay, the amount will depend on the level of risk that your lender will be assuming or taking on.
Current market rates will also dictate the amount of interest that you will need to pay. Here, our focus will be on how you can get the best rates for your mortgage.
How to Choose Between a Fixed and Variable Rate Mortgage?
One of the hardest decisions a homeowner will have to make is deciding whether to take on a fixed-rate mortgage or a variable-rate mortgage.
A fixed-rate mortgage rate will remain the same throughout the term of your mortgage. Your monthly interest rate and payment will not fluctuate. A variable rate mortgage will fluctuate up and down, depending on current market factors.
It is also attached to the prime rate, which the Bank of Canada (BOC) determines. Almost all lenders will follow the BOC’s lead and adjust their rates to match the BOC’s rate.
The benefits of a fixed-rate mortgage are that the amount that you pay will not change over time. As a homeowner, you may feel a sense of stability or security due to the unwavering amount. You will also not be impacted by interest rate increases in the future either.
The benefits of a variable rate mortgage are that they tend to become less expensive as time passes. The fluctuating interest rates may benefit you if interest rates drop more often than they rise over time.
Also, you may have the option to break your variable rate mortgage at any time during your term. The penalty for doing so is usually only three months’ worth of interest payments.
Tips to Get the Best Mortgage Rates
Being unemployed for a prolonged period will make it hard for you to qualify. You need to prove that you have been gainfully employed for at least two years.
You should also perform the necessary due diligence to explore all of your options. Compare and contrast lenders and interest rates to find the best deal. You should also try and save up money so you can put down a large down payment.
At least 20% is considered the bare minimum, and a larger amount may translate to a better mortgage rate.
You should also pay off existing debts as soon as possible. You want to prove to your lender that you can pay off debts consistently. Paying off debts on time will also boost your credit score, which may help you get a better rate, as you will be seen as having a low credit risk.
Main Factors Affecting Mortgage Rates
You can obtain your credit report for free at least once a year from a credit bureau. Go over your credit report to make sure that everything is accurate. Discrepancies and inaccuracies should be reported and disputed asap so that your lender will receive a detailed report before you apply for a mortgage.
The location of your property may also affect how much you pay. The default rate in your area, as well as local foreclosure laws, may have an impact. Whether your home is located in a rural or urban area may also impact rates.
The term of the mortgage will also affect the rate that you pay. Shorter terms tend to carry lower rates, as the borrower will have a shorter window to default on the loan. As such, a shorter term would be seen as a lower risk.
The mortgage size will also influence your mortgage rate. Generally speaking, the higher the loan amount, the more interest you will have to pay to compensate for the increased risk that your lender takes on.
Your down payment amount will also influence your rate. In most cases, putting down a higher down payment will reduce your monthly rate. Also, if you put down less than 20% on your home, you will not only have to pay a higher interest rate but will be required to pay for Private Mortgage Insurance as well.
The type of loan may also influence rates. Different loans will have other qualification criteria and different speeds. Examples of popular loan types include USDA, FHA, Jumbo, Conventional, and VA loans.
Benefits of Getting a Mortgage For Your Home
A mortgage is usually easy to repay via convenient and manageable monthly payments. They also provide greater flexibility and liquidity and serve as a borrowing method that is quite cost-effective.
Most people do not have hundreds of thousands of dollars in savings to buy a house in cash.
You will also build equity in your home over time. As you continue to make monthly payments, the value of your home will appreciate, allowing you to enjoy a very nice return on your investment when you are ready to sell.
It is also important to note that the interest that you pay on your home is tax-deductible. The tax benefits that you receive will make it easier for you to pay off your mortgage.
As can be seen, mortgage rates for a home will be influenced by several factors.
Taking the First Step
Applying for a mortgage is not easy. Many factors need to be taken into consideration to obtain the best rate possible. Creating a normal and valid profile will help increase your chances of qualifying and help you get lower rates and more favourable terms.
If your loan application is rejected, you will need to make some changes. You will need to elevate your credit score and save up more money to put down a sufficient down payment. You can then reapply for a mortgage with more confidence and less risk.