Tuesday, October 5, 2010

A low mortgage rate that’s too good to be true – you’re probably right

When you notice a low mortgage rate that stands out in an advertisement, ensure you do some research before you make a commitment to a mortgage. The low rate up front usually means that you need to sacrifice other features that can help you down the road.

The mortgage market is a competitive business. It seems that everyone wants your business! The banking psychology is that once a chartered bank has your bank account or mortgage – they can count on getting more business from you. Sometimes banks see mortgages as lost-leaders. Brokers have also become increasingly competitive – primarily because in the last few years many people have entered the business for the wrong reasons.

My recommendation is that if you need to make changes to your mortgage ensure that you work with someone who has been recommended to you. You’ll also want to look at the track record and years of experience – even if they work with a bank.

Here are a couple of tips to ensure that you get a good mortgage that will help you financially.

1. Extremely low rates often mean sacrifices in other features of the mortgage. Often the mortgage will not have as robust pre-payment options or it may be more difficult to change down the road. Because the financial institution is giving you an extremely low rate, they want you locked-in for the term of the mortgage and they’re not letting you out of it unless there’s a large penalty to pay. Read the fine details and understand them.

2. Ask how the banker or the broker makes their money. Don’t be shy. The individual should have a clear answer to how the money is made on your transaction. This will give you a clear picture of why the rate is being charged. Sometimes bankers need to make their targets for the month. Brokers on the other hand may need the money for their own personal interests rather than keeping yours first.