Understand Your Mortgage Before Signing

Talk about mortgage rates and the first topic that comes to mind is the current state of those rates.

We're in uncharted territory right now. Rates have never been this low and this generation of homebuyers is reaping the benefits. So, too, are those renegotiating mortgages.

According to a report by the Canadian Association of Accredited Mortgage Professionals, borrowers who have renewed or refinanced a mortgage in the past year are now paying interest rates that are nearly a point lower than their previous rate.

Sure the cost of borrowing money is important but according to Toronto-based mortgage broker, Mortgage Intelligence Inc., there's a lot more to consider.

"Rates are just the tip of the iceberg," says Mary Gronkowski, a regional sales director for the brokerage firm.

She says some low-rate mortgages offer limited flexibility.

So-called "no frills" mortgages might offer appealing rates, but might also limit the ability to pay off the mortgage sooner.

Then there are the "quick close" types of mortgages, again offered at attractive rates, but they might want a closing date within 30 days --something that, again, limits flexibility for both home buyers and sellers.

It's important, says Gronkowski, that everything about the mortgage being considered should fit the homebuyer's current and future personal goals. And because a mortgage will probably be the largest debt most of us will ever take on, borrowers should take the time to understand what they are signing.

So, here she offers five tips for consideration.

- Consider an assumable mortgage. A few years from now when you decide to sell your home, your low-rate mortgage could provide an extra selling point.

If your mortgage is assumable, meaning it can be transferred to another borrower, it allows the purchaser to take on your mortgage's terms and payments as part of the sale. This can be an attractive incentive, particularly in a higher rate environment.

- Review refinancing penalties. Given the low rates available today, many homeowners are weighing the benefits of refinancing. When choosing a mortgage, keep in mind that penalties are often the equivalent of three months' mortgage payments, or based on an interest rate differential, which is the difference between your current rate and the new rate. If you consider refinancing, a mortgage broker can help you decide whether the long-term savings outweigh the upfront penalties.

- Evaluate pre-payment options. Many borrowers are taking advantage of low interest rates by accelerating payments on their mortgages. For example, many lenders allow you to double up payments periodically, or make lump-sum payments of up to 20 per cent of the principal once a year. When negotiating your mortgage, make sure you understand the size and frequency of payments your lender allows.

- Review skip-a-payment options. Some lenders offer an option to skip a payment without penalty, which may come in handy in today's economy.

- Consider portability. Many mortgages have a portability feature that allows you to transfer your existing mortgage over to a new property, but not all portability terms are the same. Some lenders allow 120 days to transfer the mortgage, but others only allow for a few days or a week.

"Choosing the right mortgage involves considering where you are now, and where you may be three to five years from now," says Gronkowski. "Working with a professional can help you make sense of the many options available to you."