What options should be considered before selecting a mortgage?
Purchasing a home will probably be the largest investment any one of us will make in our lifetime. Considering how very important this decision is, it is surprising at how often people base their decision making process on two issues: loan approval and interest rates. Granted, these two options are important, but there are other, equally significant options and alternatives to look at and think about.
Over the past decade, the mortgage industry has gone through many changes and trying to keep up with these has almost become a full-time job! We will try to clarify the changes by reviewing some of the most often selected privileges and options:
Let's look at prepayment privileges:
- What percentage of the loan can be repaid each year?
- Is prepayment allowed with or without penalty?
- Is the percentage of prepayment based on the original loan amount or on the balance outstanding?
- Will prepayment privileges be granted at any time during the year or only on the anniversary date?
- Can monthly payments be increased? By how much? How often?
- Can payments be made on a monthly, bi-monthly, or even weekly schedule?
- Are extra payments allowed at regular intervals?
These are only some of the prepayment options you should consider before you commit yourself to any one mortgage. There are three equally important alternatives you should also be looking at:
1) An Assumption Clause
This allows a subsequent purchaser of your home to assume the existing financing. This feature is very beneficial when the property is listed for sale and current interest rates have been raised even higher than the existing mortgage rate.
2) A Transferable Feature
This permits a borrower to transfer the mortgage loan from the present property to another home of equal or greater value. In the event the purchaser of your home doesn't wish to assume your mortgage, you can keep your preferred rate and terms by simply transferring the mortgage to your new home.
3) A Discharge Provision
Is available through institutional lenders. The clause allows you to repay the loan, in full, at any time before the maturity date, with a maximum penalty of three months interest or the interest rate differential for the remainder of the loan. The mortgage lender will then provide a discharge of the loan. The homeowner regains free title, which is very important.
Some of these mortgage privileges and options may have a price attached to them, resulting in a higher interest rate on your loan. HOWEVER, each option should be carefully considered in light of an individual's personal lifestyle.
Always ensure that any options/privileges are stipulated IN WRITING and that you fully understand the extent of each and every provision designated. Above all, never forget to read the fine print before signing on the dotted line, because once you've committed your signature to that document, you can't change your actions without a good deal of time and, most probably, expenses.
Guy R. Gauthier