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How Payment Frequency Can Save Money

One of the decisions you will need to make before your new mortgage is set up, is what kind of payment frequency you would like to have. For many, sticking to a monthly payment is the default, however, other payment frequency choices can save you money in interest costs over time.

Monthly Payments

Monthly payments are exactly as they sound, one payment every month until the maturity date of you mortgage at the end of your term. Took a 3-year term? You will make 36 payments (12 payments a year) and then you will need to renegotiate your interest rate. 5-year term? You will make 60 payments.

$500,000 mortgage

3% interest rate

5-year term

$2,366.23 monthly payment

 

$427,372.90 remaining over 20 years

$69,346.70 paid to interest

$72,627.01 paid to principal

 

Semi Monthly

Semi-monthly is not bi-weekly. Semi monthly is your monthly payment divided by two. That means, you are making 24 payments every year, but each payment is slightly less than half of what the monthly payment would of been.

$500,000 mortgage

3% interest rate

5-year term

$1,182.38 semi monthly payment

 

$427,372.99 remaining over 20 years

$69,258.59 paid to interest

$72,627.01 paid to principal

 

Bi-Weekly

Bi-weekly, you are not making 2 payments every month. With 52 weeks in a year, you are actually making 26 payments, 2 more than semi-monthly (2 months a year you make 3 bi-weekly payments). The interest paid and balance owing are slightly less than the others, but mere cents. You will still need to make payments for another 20 years.

$500,000 mortgage

3% interest rate

5-year term

$1,091.38 bi-weekly payment

 

$427,372.36 remaining over 20 years

$69,251.76 paid to interest

$72,627.64 paid to principal

 

Accelerated Bi-Weekly

Just like regular bi-weekly, you are not making 2 payments every month. With 52 weeks in a year, you are actually making 26 payments, 2 more than semi-monthly. However because this is accelerated, the payment amount is higher.

$500,000 mortgage

3% interest rate

5-year term

$1,183.11 accelerated bi-weekly payment

 

$414,521.40 remaining over 17 years 4 months

$68,325.70 paid to interest

Payment frequency date makes a difference with your mortgage savings.

Mortgage Payment Frequency Options

$85,478.60 paid to principal

 

You have increased your yearly payment amount by $2,384.98, $11,924.90 over 5-years. That extra $11,924.90 has decreased your outstanding balance at the end of your mortgage term by $12,850.96 because more of your payments went to principal and less went to interest. Also, you will now have your mortgage paid off more than 2.5 years earlier.

The same option is available for accelerated weekly payments which will shave another month off of time required to pay back the whole loan as well. If you can afford to go accelerated, your best option is to do so! Especially in the early years where a larger portion of your payments are going towards interest, not paying down your principal.

If you have any more questions on how choosing the right Payment Frequency can save money, please do not hesitate to reach out to us at Prime Mortgage Works. Information Courtesy of Ryan O. DLC

First Time Homebuyers DON’T Tips

First time homebuyers tips help you to be prepared before closing but as importantly, AFTER you are pre-approved for a mortgage. In fact, buyers ruin their chances of closing by making simple mistakes once they hear the word “approval” from the mortgage broker. These are some of the most common mistakes people make and most importantly explain what NOT to do as the best First Time Homebuyers Mortgage Tips.

Do Not Start a New Job (please!)

While it is not the most important item for getting a pre-approval, job history and length of time at your present employer is vital to getting approved as a First Time Homebuyer.

If you have been at your current job for more than 2 years, wait until the mortgage is closed before choosing to switch to another company.

Do NOT Purchase a New(er) Car (I beg you!!)

It is so easy to understand the temptation to buy a vehicle after getting a mortgage pre-approval. Most people are a bit nervous and are filled with excitement when they learn they are pre-approved.  If their credit and income are good enough to buy a house, then surely it is good enough to get a great deal on a car, right?

The pre-approval issued by the lender was determined by the current level of debt and income at the moment the person applied for the home loan.

It is best to wait until the loan has closed before trading up on your vehicle.

Do NOT Make a Late Payment on ANY Existing Debt

As previously stated, the pre-approval is determined by a snapshot of your credit at a particular point in time. The track record that you have is documented by the credit report used for your approval. The majority of lenders will request a new credit report for you approximately one or two days before the loan closing. Any late payment that shows up could be a red flag to the lender and cause them to turn down the loan.

So, to be safe, make all payments on time while waiting for the lender to finalize your loan.

Avoid Any Unusually Large Deposits

The best First Time Homebuyers Mortgage Tip is that your credit report shows a track record of your payments over time, your bank account also has a track record. The mortgage underwriter will review your checking and savings account to see if there are any larger-than-normal deposits in the months leading up to the purchase. Avoid any large deposits that do not coincide with your normal banking habits.

Do NOT Open a New Bank Account

We previously mentioned that you should not switch jobs or add any new debt. The theme is consistency and this point fits within that theme.

Whether you have used your current bank for 6 months or 6 years, it is best to stick with that bank until the loan closes. Opening up a new account creates questions among mortgage lenders. They wonder if you are trying to hide funds in one account or if you have unrecorded debt obligations that are going to be facilitated with the new account.

Do NOT Spend your for Down Payment or Closing Costs (no Vegas trips…)

Buying a home can be exciting but also stressful. Getting the utilities switched to a new address, changing the address and hiring the movers can all take time and some funds. While you may have saved up a nice nest egg to prepare for the home purchase, don’t spend all of that money.

The estimate provided to you for the closing is just an estimate. Things like property taxes, homeowner’s insurance, and other costs can creep up and cost a bit more than anticipated. 

Do NOT Close Out Any Debt Account (First Time Homebuyer 101 tip)

It is usually a good idea to pay down debt and close the account, whether it is a credit card, furniture account or local store account. Keeping your debt as is until the mortgage closes, is key here.

Closing out a credit card, for example, may lower your credit score. Remember the pre-approval is a snapshot in time. Keep the picture the SAME as at application time.

The bottom line, leave all accounts open for the time being.

Do NOT Agree to Co-Sign on a New Loan

As mentioned in the First Time Homebuyers Mortgage Tips, borrowers should avoid any new debt, especially in the form of buying a new car. This is also true for other new debt such as new credit cards, new furniture accounts or an unsecured loan. This is especially true for being a co-signor on a loan.

If your mortgage broker told you that you were approved for a mortgage, do not co-sign for a friend or relative. Becoming a co-signer makes you 100% responsible for the new debt, regardless of the good intentions of your friend or relative. This one area is a big no-no for potential homebuyers.

Do NOT Ignore Requests from Your Broker ;)

Think of a lender as a person very similar to you, they are merely trying to do their job. In this case, their job is to help you the First Time Homebuyer.

Sometimes a mortgage underwriter will ask for very specific things. It is not uncommon for an underwriter to request documentation supporting a sale of a car, major change in job or explanation for one missed payment from 14-36 months ago!

If your broker contacts you and asks for some type of document or explanation, be prompt and thorough in providing the answer. Your entire loan could hinge upon this one item and you don’t want to get rejected because you could not find the time to respond to the lender’s inquiry.

Summing Up What Not To Do Before Closing on a House a First Time Homebuyers Mortgage
After you have received your mortgage pre-approval, continue on with your life as if nothing has changed. Keep making payments on time, don’t close out any accounts and don’t add any new debt. Along with the other suggestions above, this should keep you prepared and ready for closing day and a master at First Time Homebuyers Mortgage Tips.

Value Add Home Improvements

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various coins as a means for saving the down payment

Getting Over the Down Payment Hump

One of the largest barriers to entry into home ownership is saving enough cash for a down payment. Small every day expenses add up; and depending on the market you live in, rent may also be eating a significant portion of your income each month. You do have options; here are some ways you may be able to obtain the funds to put towards a home:

Save – Simple.

Utilizing a Tax Free Savings Account, determine an amount to save each month that you believe is reasonable yet substantial enough to get you to your down payment goal. Additionally, set up automatic transfer into that accounts that line up with payday and bills will soon find yourself getting over the down payment hump.

Extra Income

Ever consider a side hustle or second job. Put 100% of this cash flow into your down payment.

Home Buyers Plan 

Have money in your RRSP account? Incidentally, the Federal government will allow you to pull up to $35,000 from your RRSP account. Note, you have 15 years to return the funds back into your RRSP account. The easiest option for getting over the down payment hump.

Sell an Asset

If you have a valuable asset your willing to give up, sell it! Just make sure to establish a clear paper trail; get a receipt or signed bill of sale to legitimize the source of funds.

The Bank of Mom and Dad

This may or may not be possible. Parent may have built up some equity in their home they can access with a secured line of credit. If this is a gift, a signed gift letter stating so will be needed. If it is to be replayed, the payment must be included in your debt ratios used to qualify.

How Mortgage Brokers Get Paid

Firstly, how do mortgage brokers get paid here at Prime Mortgage Works? We do not charge any retainer or upfront fee for our services. Actually, you don’t pay any fee directly to us for our services, ever! Yes, 100% free, no pressures advise! We are licensed professionals and are governed by provincial bodies, who have you, the clients, best interest in mind.

Who Pays the Broker?

The lender pays us, once your purchase or refinance has completed and you have received your mortgage funds. How do we choose which lender? We take into account many features of a mortgage and your specific needs and wants to advise on the BEST option for you. Underlining why it’s important to understand how mortgage brokers get paid. Lenders typically pay anywhere between .8 to 1% of the final approved mortgage amount directly to the lender. This means for you the borrower, there is no out-of-pocket expense due at closing. Rather, lenders pay the mortgage broker directly from the interest they earn from the mortgage you have secured with them.

The Broker’s Incentive

But, rest assured that it is our mission to guide you through the entire financing process. As we are not paid until after closing, this ensures that we have your best interest in mind at all times. We are always happy to answer any questions, anytime, whether you have just completed financing, or are three years into your term and considering accessing some of the equity in your home.

Utilizing the Equity in Your Home

How Utilizing the Equity in Your Home can work to your advantage

Having been in your home for some time, steadily paying off your mortgage, you are setup to be utilizing the equity in your home. To access it, begins with refinancing. This is likely more accessible and at a lower cost than obtaining a loan not secured by your valuable asset – your home. For the most part, home equity loans and lines of credit hold lower interest rates. You will be able to access up to 80% the appraised value of your home.

What can be done with these Funds?

You can then utilize these funds to make investment with higher returns. You may plan to use the funds to make improvements on your home, increasing the resale price potential. Or you may plan to consolidate excising debt charging you a high interest rate, decreasing your debt load faster and increasing your monthly cash flow. Or you may want to pursue a business opportunity that will increase your future earning potential. The opportunities are plenty when you are utilizing the equity in your home.

How to get started?

We will take a simple application from you and gather the necessary documentation from you directly. We will then package the application and present to the lenders that we are working with on a regular basis. Allowing us to handle all aspects of the mortgage refinance, you can ensure you will enjoy a smooth process. From start to finish we will take care of all of the details when utilizing the equity in your home.

canadian cash and coins

Insured and Uninsurable Mortgages?

Mortgage rate pricing is based much on insurance:

Insured and uninsurable mortgages will determine the rate that a lender will offer for your mortgage. This will depend heavily upon the lender’s ability to finance their own operation in the background. It’s important to understand the key aspects when your mortgage broker will discuss uninsurable and insurable mortgage products.

What is an Insured Mortgage?

Insured mortgages are covered by mortgage default insurance through one of three insurers – CMHC, Genworth or Canada Guaranty. A premium is added to the mortgage amount. The amount is a percentage of the loan based on the loan to value ratio with a down payment of less than 20%. These mortgages are most favored by the banks and are reflected by the best rate offers. The maximum amortization allowed for an insured mortgage is presently 25 years.

What is an Insurable Mortgage?

Insurable mortgages do not necessarily require an insurance premium when you are providing a down payment larger than 20%. However, if the insurers rules allow, the lender has the option to obtain insurance themselves. As a result, the borrower rarely knows if and when their mortgage is officially insurable. The maximum amortization will be limited to 25 years, similar as an insured mortgage would be.

Finally, Uninsurable Mortgages

Uninsurable mortgages do not meet the insurers rules; such as refinances and mortgages with amortization longer than 25 years. This is arguably the biggest difference between insured and uninsurable mortgages. As a result, no premium is paid by either the borrower of the lender to obtain default insurance. The risk with this type of mortgage is passed onto the borrower via higher interest rates. Having said that, uninsurable mortgages are often far more flexible in terms of borrowing guidelines. We are happy to discuss the distinct differences in those borrowing guidelines.

person counting cash

Down Payments

Depending on how much you have saved and whether you are being supported with a gift from the bank of mom and dad, what you are able to put towards a down payment will vary. In Canada, the minimum down payment is 5% of the purchase price, however there are also benefits to putting down over 20%.

Before the creation of the Canadian Mortgage and Housing Corporation (CMHC), the minimum, 20% down was a major barrier to many Canadians wanting to purchase a home. To combat this barrier and encourage home ownership, CMHC began offering mortgage default insurance; if you default on your payments, they will reimburse the lender. They charge an insurance premium on mortgages offer by lenders with smaller down payment and lower interest rates. This premium, of course, covers any losses they may incur if a mortgage default does occur.

So, why put down a larger down payment? Your mortgage amount will be less, payments smaller, and less interest paid over the life of your mortgage. With over 20%, you will save money by not having to pay any mortgage insurance premiums. Between 5% and 20%, the more money down, the lower the insurance premium.

It is also important to make sure to account for closing and other unexpected costs, so completely draining your savings towards a down payment is not the best course of action.

laptop with hands on keyboard

Self Employed? Get Approved!

Self Employed? Get Approved!

As a self employed individual to get approved, means taking advantage of write-offs that allow your income to be in a lower tax bracket. However, this may also hurt your ability to qualify for a mortgage. Lenders generally require two year of Tax Returns; two years Notice of Assessment  along with two years Financial Statements. For those self-employed, Tax Returns show a lower number for income, this will hinder qualifying based on income necessary to service the mortgage.

Our advice:

Think ahead. Two years prior to seeking a mortgage, work to get your personal taxable income to a larger number. A key piece if you are self employed to get approved.

Work with a certified accountant, lender will be more inclined to consider financials prepared and submitted by a professional that will consider you financial goals of getting a mortgage.

If you want a mortgage sooner rather than later and haven’t planned for this when filing your taxes, you can use Stated Income so long as you have been in the same profession for at least two years before becoming self-employed. More documents will be required, including bank statements that prove consistent income.

Lastly, you may have to consider a B lender. B lenders will be more flexible in considering your income. Of course, this does come at a cost of a higher interest rate. Once you have had time to increase your income,  you may be able move to the A lender space.

What’s in a Good or Bad Credit Score

For many clients in the pre-approval process, their credit report and credit scores are a source of stress and mystery. Even with the endless information available at the click of a mouse, there seems to be no straightforward summary. This is they key information for What’s in a Good or Bad Credit Score.

So, what determines a good (or bad) credit score?

Good Credit

From the time you get your very first credit card, your credit is being built. Keep in mind these relatively simple habits to develop that will ensure you achieve a desirable high number.

  • Pay your credit cards and all bills on time –including your cell phone and Internet!
  • Pay your parking tickets on time – that’s right, unpaid tickets will affect your credit score.
  • It’s ok to have more than one credit card, but keep it under control. The key is to not be continuously using your limits to the max! A good rule of thumb is keeping utilization under 30% of your available credit.
Myths

It is a common misconception that once a credit account is closed, you are no longer liable to pay; maybe the refusal to pay is rooted in principal, perhaps from a dispute with the cable company over a late charge. No matter the reason, once the creditor has reported the missing payment, you score goes down for 120 or until the creditor closes the account. But it doesn’t end there; they may send your account to a collection agency that will then add their own feels. The worst part, you now owe more money! The longer this goes on, the worst of an effect it has on your credit and the more difficult it becomes to recover you score.

You may have also heard that your credit score falls every time it’s checked. This is not necessarily true. Sites like Credit Karma allow you to check your score as many times as you like without damaging your score – although theses score may not be exactly what the credit bureau holds, they are certainly a good indication.

What DOES affect your score is a lender or creditor looking into your credit report. The more times lenders check (especially in a short period of time), the greater chance your score is going to decrease.

The Benefit of Using a Broker

To address that last point; many mortgage shoppers will have their credit pull multiple times within a short time frame when shopping around at various lenders (who each look into their credit report).

A huge benefit to using a broker is we will only check your credit once! Of course, that certainly doesn’t limit our reach; we have access to all sorts of lenders and the in depth knowledge of each lenders criteria for qualification, so we can find the perfect one that meets all your needs!