March 21st, 2014
New Home Guide
Mortgage Options ~ 8 tips to review before you renew
By Michelle Malcolm-Francis
Chances are your circumstances have changed from when you obtained your first mortgage. Whether it’s a change in job or family situation, mortgage renewal time is a great opportunity to re-evaluate your needs and the mortgage that works best for you. In most cases, when you renew your mortgage, you are simply starting the mortgage from scratch. The existing mortgage is closed and a new mortgage with new terms and rates is set up.
Typically, the process starts when your lender sends you a mortgage renewal statement about 30 to 45 days before your current mortgage matures. At that point, you will have to make an important decision about your future mortgage. Will it be based on signing the renewal notice and returning it to your financial institution, no questions asked, or will you take the time to meet with your lender face-to-face? If you make the wrong choice it could be a costly mistake. Since most lenders want to keep your business, meeting with them could help you secure a reduced interest rate and better term. The renewal letter from your lender may not give you the best rates available. In fact, these are often higher than the lender’s lowest rate. Negotiating a rate and other privileges can strengthen your financial position. If your lender is not willing to do this, you are not obliged to renew your mortgage with them.
When it’s time to renew your mortgage, a little review could help put thousands of dollars in your pocket and bring you a step closer to being mortgage free. Too often, Canadians receive their renewal notice and sign on the dotted line without weighing their options. Don’t be swayed by the convenience of this route. By doing your homework, you can bring yourself one step closer to mortgage freedom.
8 Tips to review before you renew
01 Pay down as much as you can afford on the existing mortgage before signing the new deal. This can save you a lot of interest over the life of the mortgage.
02 Banks are often willing to negotiate rates and terms, but are restricted by the products they have. On the other hand, mortgage brokers deal directly with the mortgage underwriting department from most financial institutions and can look for the lowest interest rate on your behalf.
Making more money? Try shortening the term of the mortgage by paying bigger lump sums each month. This strategy not only cuts the repayment period, it also saves you interest in the long term and pays down your mortgage faster.
03 The new mortgage should be tailored to your specific needs and not to the latest headline news. Interest rates can rise and fall like a roller-coaster and are hard to predict over long terms.
04 If the renewal rate is lower than your previous rate and you are still comfortable with making these payments, keep the payments the same at the lower rate. By doing this, you will reduce the amortization period of your mortgage.
05 There are a variety of mortgage types available for homeowners and choosing the right one can be confusing. Lenders will off er you terms ranging from short-term open to longer-term closed and locked-in rates. If you plan to sell your home soon, a short-term mortgage or one with flexible terms will help you avoid penalty charges if you plan to get out before the mortgage comes to an end.
Tip ›› Making more money? Try shortening the term of the mortgage by paying bigger lump sums each month. This strategy not only cuts the repayment period, it also saves you interest in the long term and pays down your mortgage faster. Although it increases your monthly mortgage payment and raises your monthly expenses, it’s a great option for those who are financially sound, planning an extended leave or working toward early retirement.
›› Apart from making larger payments, you can also change the frequency of your mortgage payment from monthly to biweekly or weekly installments, which will save you a bundle in the long run.
›› If your budget is tight, choosing a long-term mortgage with a lower, fixed-interest rate may be a better option. A three-, four- or five-year term is considered a long-term mortgage. And even though the rates are higher than a short-term mortgage, it can help you manage your budget accordingly.
06 You can increase or decrease the amortization period of your mortgage, which can range up to 25 years. If you are looking to minimize your monthly payment, a longer repayment period is perfect. If you are looking to pay off your mortgage faster, a shorter amortization period is the way to go.
07 Renovations are a great way to increase the value of your home, but these projects are usually expensive. You can make this type of project affordable by adding a line of credit to your mortgage, using existing equity or keeping your mortgage payments low.
08 Refinancing your mortgage is something you may want to consider during mortgage renewal time. Refinancing frees up cash you may need for the unexpected. If you choose to refinance, you must pay out the mortgage in full and arrange a new mortgage with the same or a new lender. However, you will be expected to pay extra fees such as appraisal, legal and other costs, as it is considered a brand-new mortgage.
Becoming mortgage-free requires some planning. Taking a fresh look at your future and staying on top of your renewals will not only help you get the best deal, it will also help you enjoy the benefits of home ownership sooner.
Source: New Home Guide