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Key things to consider when shopping for a home loan

By Xuefei Shi

1. Lowest interest rate mortgage not equivalent to the best deal
Interest rate alone cannot be relied on to make the best mortgage financial decision. Mortgage rates can be artificially reduced by adding upfront discount points or adjustable rate features that may not make good financial sense in the context of your situation.

2. Annual Percentage Rate (APR) Doesn’t Tell the Whole Story
APR attempts to deal with some of the inadequacy of mortgage interest rate alone by factoring in up-front fees and potential future rate adjustments. However APR has limited value because it does not consider how quickly a mortgage principal is paid down. APR bases future rate and payment adjustments for adjustable-rate mortgages on current index rates rather than forecasted future rates.

3. Low payments – Potential negative impacts
Mortgage payments are important in terms of affordability, but relying on payment alone to select the best loan can lead to disastrous consequences. Monthly payment can be manipulated to enhance affordability by extending the term, adding up-front closing costs or adding adjustable rate features, all of which can negatively impact your wealth.

4. Time matters – How long do you expect to live in this property?
Time matters because mortgage interest rates are intimately tied to time. Longer-term fixed-rate loans have higher interest rates. Shorter-term fixed-rate loans have lower interest rates. If you got a 30-year fixed loan when you only planned on owning a property for 5 years, you paid too much for your mortgage.

5. Financing closing costs – Effect in the long run
Lenders will from time to time dismiss up-front costs of a mortgage by adding those costs to the loan amount. If you are financing closing costs, you are paying for the closing costs with the equity in your property. And because of interest charges, you can expect to pay double or triple the initial cost of the closing costs over the life of the loan.

6. Longer-term mortgages & the consequences
By selecting a longer-term mortgage they will be choosing to pay dramatically higher interest charges over the life of the loan. While shorter-term mortgages will almost always have a higher payment, that difference in payment is working for you by going directly toward reducing your principal balance. In addition, shorter-term loans almost always have a lower interest rate, which also reduces total costs over the life of the loan.

7. Workout the total cost accurately
Total cost is the sum of all costs, including interest charges and closing fees, over the life of a mortgage. With all of the things to consider in a mortgage, it is easy to overlook cost. Many borrowers don’t realise that there are two portions of the mortgage payment, one that works for you and the other that works against you. The principal portion of your mortgage payment works for you because it helps build equity in your property. The interest portion of your payment is working against you because it goes directly to the bank. Total cost is the amount that you will pay towards your mortgage over its life that is not working for you because it’s going to someone else. So when calculating the total cost of a mortgage, always take into consideration how much interest you will pay to the bank in addition to the various fees and other closing costs.

8. Consider impact on wealth with Net Benefit
Your choice of mortgage is one of the most important financial decisions that you will make in your lifetime. Different mortgages can have dramatically different wealth outcomes that cannot be determined by looking at payment or rate alone. The right mortgage could literally create tens of thousands of dollars in wealth for you over its lifetime. Net Benefit projects how your wealth will grow, both in terms of equity and payment savings, over the life of your mortgage.

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