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Financial Wellness

July 10th 2019 - written by Amanda Huinink (previously posted) 

You are looking to buy a home or condo but you aren’t exactly sure how mortgages work. Before diving into the real estate market head on, take a minute to understand what you are getting yourself into.

A mortgage is a loan you use in order to buy a property. Interest is paid based on the amount you are borrowing, the time frame you are planning to pay it back and the rate you negotiate when you sign your mortgage papers.

It is important to not only shop around for the best interest rates, but also read up on the terms of the mortgage offer. For example, at Member Savings we waive the interest penalty if you need to break your mortgage term before it matures. This could save you thousands of dollars if you are locked into a 5-year mortgage term and you decide to move and sell your home within the first year or two. Most banks will not waive this penalty. If you want to get the lowest interest rate, which is often the longest term, keep this tip in mind. Most people shopping for a mortgage can not imagine moving again within 5 years but a surprising number do!

Mortgage terms can vary and interest rates can fluctuate right along with them. Credit Unions offer anything from variable rates which are not locked in to any term, up to 5 year fixed rates and everything in between. You are guaranteed the rate and term you choose for that given time frame. Once your mortgage term is up for renewal, newer rates may be higher or lower, often volatile based on the economy. If you prefer a variable rate, make sure you are comfortable with a bit of fluctuation in your monthly mortgage payment.

One big part of getting a mortgage is your down payment. The bigger your down payment, the lower your mortgage. The lower your mortgage, the less interest you will pay. Less interest means lower payments. These lower payments are only one of the reasons to aim for a 20% down payment. Less than 20% down forces you to apply for a high-ratio mortgage, requiring extra insurance as you are seen as a greater risk or a higher chance at you defaulting on your mortgage.

Start saving up your down payment as early as you can and speak to your local credit union about getting a pre-approval. Knowing where you stand and what your end goal is will make the whole process so much more enjoyable.