10 Questions Every Borrower Should Ask

General Rob Skoko 28 May

1. If I have mortgage default insurance do I also need mortgage life insurance?

  • Yes. Mortgage life insurance is a life insurance policy on a homeowner, which will allow your family or dependents to pay off the mortgage on the home should something tragic happen to you. Mortgage default insurance is something lenders require you to purchase to cover their own assets if you have less than a 20% down payment. Mortgage life insurance is meant to protect the family of a homeowner and not the mortgage lender itself.


2. What steps can I take to maximize my mortgage payments and own my home sooner?

  • There are many ways to pay down your mortgage sooner that could save you thousands of dollars in interest payments throughout the term of your mortgage. Most mortgage products, for instance, include prepayment privileges that enable you to pay up to 20% of the principal (the true value of your mortgage minus the interest payments) per calendar year. This will also help reduce your amortization period (the length of your mortgage). Another way to reduce the time it takes to pay off your mortgage involves changing the way you make your payments by opting for accelerated bi-weekly mortgage payments. Not to be confused with semi-monthly mortgage payments (24 payments per year), accelerated bi-weekly mortgage payments (26 payments per year) will not only pay your mortgage off quicker, but it’s guaranteed to save you a significant amount of money over the term of your mortgage. With accelerated bi-weekly mortgage payments, you’re making one additional monthly payment per year. In addition to increased payment options, most lenders offer the opportunity to make lump-sum payments on your mortgage (as much as 20% of the original borrowed amount each year). Please note, however, that some lenders will only let you make these lump-sum payments on the anniversary date of your mortgage while others will allow you to spread out the lump-sum payments to the maximum allowable yearly amount.


3. Can I make lump-sum or other prepayments on my mortgage, or will I be penalized?

  • Most      lenders enable lump-sum payments and increased mortgage payments to a      maximum amount per year. But, since each lender and product is different,      it’s important to check stipulations on prepayments prior to signing your      mortgage papers. Most “no frills” mortgage products offering the lowest      rates often do not allow for prepayments.








4. How do I ensure my credit score enables me to qualify for the best possible rate?

  • There      are several things you can do to ensure your credit remains in good      standing. Following are five steps      you can follow: 1) Pay down credit cards.      The number one way to increase your credit score is to pay      down your credit cards so they’re below 70% of your limits. Revolving      credit like credit cards seems to have a more significant impact on credit      scores than car loans, lines of credit, and so on. 2) Limit the use of credit      cards. Racking up a      large amount and then paying it off in monthly instalments can hurt your      credit score. If there’s a balance at the end of the month, this affects      your score – credit formulas don’t take into account the fact that you may      have paid the balance off the next month. 3) Check credit limits. If your lender is slower at      reporting monthly transactions, this can have a significant impact on how      other lenders view your file. Ensure everything’s up to date as old bills      that have been paid can come back to haunt you. Some financial      institutions don’t even report your maximum limits. As such, the credit      bureau is left to only use the balance that’s on hand. The problem is, if      you consistently charge the same amount each month – say $1,000 to $1,500      – it may appear to the credit-scoring agencies that you’re regularly      maxing out your cards. The best bet is to pay your balances down or off      before your statement periods close. 4) Keep old cards.      Older credit is better credit. If you stop using older      credit cards, the issuers may stop updating your accounts. As such, the      cards can lose their weight in the credit formula and, therefore, may not      be as valuable – even though you have had the cards for a long time. Use      these cards periodically and then pay them off. 5) Don’t let mistakes build      up. Always dispute      any mistakes or situations that may harm your score. If, for instance, a      cell phone bill is incorrect and the company will not amend it, you can      dispute this by making the credit bureau aware of the situation.


5. What amortization will work best for me?

  • While the lending      industry’s benchmark amortization period is 25 years, and this is the      standard that is used by lenders when discussing mortgage offers, and      usually the basis for mortgage calculators and payment tables, shorter or      longer timeframes are available – to a maximum of 30 years. The main      reason to opt for a shorter amortization period is that you’ll become      mortgage-free sooner. And since you’re agreeing to pay off your mortgage      in a shorter period of time, the interest you pay over the life of the      mortgage is, therefore, greatly reduced. A shorter amortization also      affords you the luxury of building up equity in your home sooner. Equity      is the difference between any outstanding mortgage on your home and its      market value. While it pays to opt for a shorter amortization period,      other considerations must be made before selecting your amortization.      Because you’re reducing the actual number of mortgage payments you make to      pay off your mortgage, your regular payments will be higher. So if your      income is irregular because you’re paid commission or if you’re buying a      home for the first time and will be carrying a large mortgage, a shorter      amortization period that increases your regular payment amount and ties up      your cash flow may not be the best option for you.








6. What mortgage term is best for me?

  • Selecting      the mortgage term that’s right for you can be a challenging proposition      for even the savviest of homebuyers, as terms typically range from six      months up to 10 years. The first consideration when comparing various      mortgage terms is to understand that a longer term generally means a      higher corresponding interest rate. And, a shorter term generally means a      lower corresponding interest rate. While this generalization may lead you      to believe that a shorter term is always the preferred option, this isn’t      always the case. Sometimes there are other factors – either in the      financial markets or in your own life – that you’ll also have to take into      consideration when selecting the length of your mortgage term. If paying      your mortgage each month places you close to the financial edge of your      comfort zone, you may want to opt for a longer mortgage term, such as five      or 10 years, so that you can ensure that you’ll be able to afford your      mortgage payments should interest rates increase. By the end of a five- or      10-year mortgage term, most buyers are in a better financial situation,      have a lower outstanding principal balance and, should interest rates have      risen throughout the course of your term, you’ll be able to afford higher      mortgage payments.


7. Is my mortgage portable?

  • Fixed-rate products usually have a      portability option. Lenders often use a “blended” system where your      current mortgage rate stays the same on the mortgage amount ported over to      the new property and the new balance is calculated using the current rate.      With variable-rate mortgages, however, porting is usually not available.      This means that when breaking your existing mortgage, a three-month      interest penalty will be charged. This charge may or may not be reimbursed      with your new mortgage. While porting typically      ensures no penalty will be charged when you sell your existing property      and buy a new one, it’s best to check with your mortgage broker for      specific conditions. Some      lenders allow you to port your mortgage, but your sale and purchase have      to happen on the same day, while others offer extended periods.








8. If I want to move before my mortgage term is up, what are my options?

  • The answer      to this question often depends on your specific lender and what type of      mortgage you have. While fixed mortgages are often portable, variable are      not. Some lenders allow you to port your mortgage, but      your sale and purchase have to happen on the same day, while others offer      extended periods. As long as there’s not too much time      between the sale of your existing home and the purchase of the new home, as      a rule of thumb most lenders will allow you to port the mortgage.      In other words, you keep your existing mortgage and add the extra funds      you need to buy the new house on top. The interest rate      is a blend between your existing mortgage rate and the current rate at the time you require the extra money.     


9. What steps can I take to help ensure I don’t become a victim of title or mortgage fraud?

  • The best way to prevent fraud      is to be aware of how it’s committed. Following are some red flags for mortgage fraud: someone      offers you money to use your name and credit information to obtain a      mortgage; you’re encouraged to include false information on a mortgage      application; you’re asked to leave signature lines or other important      areas of your mortgage application blank; the seller or investment advisor      discourages you from seeing or inspecting the property you will be      purchasing; or the seller or developer rebates      you money on closing, and you don’t      disclose this to your lending institution. Sadly, the only red flag for      title fraud occurs when your mortgage mysteriously goes into default and      the lender begins foreclosure proceedings. Even worse, as the homeowner,      you’re the one hurt by title fraud, rather than the lender, as is often      the case with mortgage fraud. Unlike with mortgage fraud, during title      fraud, you haven’t been approached or offered anything – this is a form of      identity theft. Following      are ways you can protect yourself from title fraud: always view the      property you’re purchasing in person; check listings in the community      where the property is located – compare features, size and location to      establish if the asking price seems reasonable; make sure your      representative is a licensed real estate agent; beware of a real estate      agent or mortgage broker who has a financial interest in the transaction;      ask for a copy of the land title or go to a registry office and request a      historical title search; in the offer to purchase, include the option to      have the property appraised by a designated or accredited appraiser; insist      on a home inspection to guard against buying a home that has been      cosmetically renovated or formerly used as a grow house or meth lab; ask      to see receipts for recent renovations; when you make a deposit, ensure      your money is protected by being held “in trust”; and consider the      purchase of title insurance.










10. How do I ensure I get the best mortgage product and rate upon renewal at the end of my term?

  • The      best way to ensure you receive the best mortgage product and rate at      renewal is to enlist your mortgage broker once again to get the lenders      competing for your business just like they did when you negotiated your      last mortgage. A lot can change over a single mortgage term, and you can      miss out on a lot of savings and options if you simply sign a renewal with      your existing lender without consulting your mortgage broker.