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Shopping around for the best interest rate can save you thousands over the course of your mortgage.
When you’re buying a home, comparing interest rates and mortgage terms at different banks is a smart thing to do, since your mortgage loan is likely to be the biggest debt you’ll assume in your lifetime. The interest rate you pay on your mortgage will substantially affects the overall cost of your residence, or the returns on your rental investment. Here are a few steps you can take to ensure you get the best deal possible:
Find out your credit score
Your credit score will be used by lenders to determine whether you qualify for a mortgage, and whether you will be offered the lowest interest rates. Higher credit scores will lead to better terms on your loan. For this reason, it’s always best to get a copy of your credit report at least 6 months before you apply for a pre-approval. That way, you’ll have the time to fix any errors before your credit score is reaches the bank.
Compare different loan options
There are many types of home loans, each catering to different financing needs. The two main types are fixed rate and variable rate mortgages.
Fixed-rate mortgage: A fixed rate mortgage is a loan in which the total mortgage amount and charges paid each month by the borrower remains the same for the entire term of the loan, or for an agreed-upon part of the term. This type of mortgage is attractive to many borrowers because it allows for predictable accounting, and protects them against the risks of market fluctuations.
Adjustable-rate mortgage: With an adjustable rate, both the interest rate and the mortgage payment vary, based on market conditions. Under normal conditions, the initial interest rates are fixed for a specific period of time, after which it is readjusted on a monthly or annual basis.
Consider a mortgage broker
A mortgage broker will shop around at a variety of different lending institutions, to find you the most favourable terms. Since mortgage brokers have a large network of lenders, they can steer you towards options you wouldn’t have known about otherwise. A mortgage broker is also equipped to spot onerous terms in mortgage contracts.
Look into incentive programs for first time buyers
If you’re a first time buyer, you may qualify for an interest free loan to contribute towards your closing costs. The Home Buyer’s Plan, for example, allows first time buyers to borrow up to $25,000 a year from their retirement savings (RRSP’s) to help finance the purchase of their first home. While the tax-free loan can be beneficial, you should consult with your financial planner to determine whether the HBP is the right choice for you.
Once you’ve chosen a lending institution, apply for a pre-approval
Having a pre-approval in hand before you start shopping for your home is not a requirement, but it is highly advantageous. A pre-approval will strengthen your offer in the case of a bidding war, and will shop sellers that you are qualified and serious. It will also prevent you from visiting homes you can’t afford.