Is a Cashback Mortgage Right for You?

First off, let’s start with what is a Cashback Mortgage?  Several lenders have been offering mortgages that actually give you some Cashback – a rebate – anywhere from 1% to 5% of the mortgage amount, when you take out a mortgage with them. Usually, you get a nice fat cheque within a week of the mortgage closing, which some companies are using as a mortgage switch incentive, and in some cases this can form some or all of your down payment.

This money is given to you, without limits, and can be beneficial in a new home to cover things like blinds, new carpet/hardwood, appliances, even furniture, or can even be used to cover moving expenses and legal costs at closing.

One thing’s for sure, Cashback mortgages are worse than just getting the better rate upfront.  Let’s assume that you take advantage of a 5% of the purchase price incentive that is generously being offered to you.  The cost of this generosity is usually a higher interest rate, or paying full-posted rates!

So let’s assume you buy a house for $400,000.  You put down 5% of your own money and get a new mortgage of $380,000 with a 25-year amortization at 4.00%.  This will cost you $13,356 in interest over five years.  If, however, you use the money for the down payment, and are paying the full-posted rate of 5.85%, you’ll pay an extra $6,618 in interest over 5 years (almost $20,000-your down payment)!

And if you break the Cashback mortgage term before it is due you are not only penalized with an interest penalty, but you’ll also have to pay back a pro-rated amount of the Cashback.  So if you decide to move or switch mortgage companies 3 years into your term, you would have to pay a mortgage penalty plus approximately $12,000 of the original Cashback before you can leave.

In short, here are some reasons why a Cashback mortgage is not the best option:

– You pay significantly more in interest

– Your monthly payments are higher which can restrict cash flow

– You have the choice of what to do with the money. This is usually not wise for most as it is usually put in an account and quickly spent

– Even if the cash back money is invested, it is not reasonable to expect 23%+ annual returns over 5 years in the markets

Here are the good sides to a Cashback mortgage:

– Can cover normal out-of-pocket expenses in a new home like blinds, furniture and legal costs

– Paying down your mortgage (apply the Cashback directly to the principle)

To find out more about if a Cashback Mortgage is right for you, or to explore all your options on mortgage financing, speak to me today.

 

Mark Brennan
Mortgage Broker/Owner
First Start Mortgage

Are You Pre-Approved or Pre-Qualified?

You just finished your appointment with your lender, and notice in hand you are excited to start home shopping. But without asking the right questions, or obtaining the proper information, you could be easily fooled. Most buyers easily assume that once a lender pre-qualifies them for a mortgage that they are actually pre-approved. The truth is that the two terms are more further apart than you may imagine, and the mistake could cause heartache and frustration.

What is a Pre-Qualification?

You would supply the lender with your overall financial picture, including debts, income, and down payment. After inputting this data, the lender could give you an idea of the amount of mortgage you would qualify for. Realistically, this is a very basic step that you could accomplish yourself by using an online mortgage qualification calculator.  There is no cost associated with this step, and does not take into account your credit rating or other factors that are needed to properly consider your ability in purchasing a home.

As this is a quick process, and based on limited information, a pre-qualification is not a guarantee. You are simply assured of a rate hold at best, which can be revoked upon further review of your full financial picture at the crucial approval stage.

What is a Pre-approval?

A pre-approval takes a pre-qualification one step further. You now supply more detailed and personal information to complete a mortgage application. A credit inquiry will be completed at this stage, as well as supplying necessary income and other documentation. You will be given a firm approval notice which details the amount of mortgage you qualify for, the rate you are guaranteed for, the term of the approval, and conditions that the lender has.

Once you have all these details in writing, this puts you in a confident position in writing an offer. There is no wasting your time, or a Realtor’s time, in seeing homes that you are not able to afford, and in a competitive market you will show the seller that you offer is serious.

What’s Next?

Now that your offer has been accepted, the next step is to obtain a mortgage commitment from the lender. This will be based on the previous information supplied in the pre-approval, but now also on the property you are buying. A commitment letter will be the final approval letter, and outline any remaining conditions the lender may have from the pre-approval as well as related to the property.

On a final note, a pre-qualification is not the same as a pre-approval. A lender has no obligation to proceed on your application based simply on a pre-qualification, and not knowing that could cause you to lose out on your dream home.

More lenders are choosing to offer pre-qualifications as they use less time and resources, and also since some buyers were simply shopping around and the deal would never happen. Contact me to find the appropriate lender to suit your needs, and to lock in your pre-approval today!

 

Mark Brennan
Mortgage Broker
First Start Mortgage

 

Image courtesy of Master Isolated images at FreeDigitalPhotos.net

Tips For First-Time Home Buyers

Follow these five tips to have a successful transition into home ownership.

1. Try out life as a homeowner

To find out if you are ready for home ownership, try this tip – meet with a mortgage professional and explore that the home you want is likely going to cost you $1,500 a month. Currently, your monthly rent is $800. Every month, pay your rent, and then set aside an additional $700 into a savings account, Tax Free Savings Account (TFSA), or RRSP. Try it for three to six months to make sure you’re comfortable with the additional financial cost.  PS – you are also saving more for your down payment at the same time!

2. Save automatically for your down payment

Set up a pre-authorized transfer from your account to your savings vehicle. That way there is less temptation to spend the additional funds if you have to move the money yourself. Out of sight, out of mind.

3. Pre-approve your financing

Before you start visiting homes, make sure you are fully qualified. There is a big difference between pre-qualified and pre-approved (for a future article). You want to ensure you know how much of a mortgage you qualify for, as well as locking in your fixed interest rate for the term selected. There is nothing more frustrating than finding that perfect home and then getting turned down because of delays or surprises on the financing side later. Make this a priority.

4. Assemble your team

You will need input from other experts like your mortgage professional, a real estate agent, real estate lawyer, home inspector, and possibly a condo document review company. Interview each to find the professionals you are comfortable working with, or ask me for individuals and companies that we have pre-screened and recommend.

5. Be ready when you find the right home

When you find a home you really like, you will want to be able to make an offer right away. Normally a deposit of $5,000 to $10,000 (or more depending on the home), will give your offer more weight and show that you’re a serious buyer. Your real estate agent can assist you with the right amount you should put on the offer. Make sure you have that cash in your account so you are not caught at the last minute trying to move money around while someone else can get an offer in and beat you to it.

Contact me to get started today!

 

Mark Brennan
Mortgage Broker/Owner
First Start Mortgage

Image courtesy of Stuart Miles at FreeDigitalPhotos.net

Real estate horror stories

Think you wouldn’t get stung in a real-estate disaster? Neither did these buyers. Read on and learn from their mistakes.

By Rasha Mourtada

Like all first-time homebuyers, Sarmishta Subramanian was giddy with excitement when she arrived to officially take possession of her house. But her giddiness turned to irritation when she discovered that the previous owner had left bags of garbage strewn across the front porch. She became even angrier when she saw that he’d taped a “Please don’t let the cats out” sign on the front door. But when she peered beyond the sign into the house, the Toronto resident was outraged: the seller’s furniture, boxes and more garbage were still inside- not to mention his cats! He hadn’t even begun to move out; it was clear he was still living there. “I thought, What the hell are you still doing in my house?”

Sarmishta contacted her lawyer and was assured the guy would be out by midnight. But when she showed up the next day, she discovered that the seller hadn’t removed any of his junk, leaving behind garbage, broken furniture and appliances, and a special present from his pets- cat poop on the basement floor. Sarmishta’s new house was trashed, and if she wanted it cleaned up, she’d have to do it herself. “It ruined what should have been a happy and exciting day.”

You can’t anticipate every single thing that might go wrong during a real-estate transaction, but there are a number of steps you can take to help ensure your experience is as smooth as possible. For instance, Sarmishta’s case might have been helped by a clause in the purchase and sale agreement stating that the seller was obligated to leave the house in clean condition.

So how can you protect yourself from potential real-estate disappointments? Read on for valuable lessons learned the hard way!

Lesson #1 – Never skip the home inspection

When Lynne Vail and her fiancé, Chris, bought a condo in Ottawa, their inexperienced real estate agent advised them to skip the home inspection. Because they weren’t buying a house, the agent said many of the problems a home inspector would look for(specifically exterior issues related to the roof, chimney and gutters)wouldn’t be applicable. The agent also advised them that if there were problems with any of the interior systems(such as ventilation or plumbing), the condo corporation would handle them. Against her better judgment, Lynne let it go.

She and Chris got married, went on their honeymoon and moved into their new place. “We were really excited,” she says. “This was the beginning of our new lives.” A few weeks later, while watching TV one night, Lynne smelled something burning. So she followed her nose, and when she got to the air-conditioning vent, she saw flames. When she flipped open the heating and air- conditioning unit and turned it off, the flames went out right away, but Lynne didn’t want to take any chances, so she called the fire department.

The first thing the firefighter said to Lynne was, “Why have you never cleaned the air-conditioner filter?” The five inches of dirt trapped there had caught fire, and the fire itself would have been prevented if the filter had been clean and the previous owners hadn’t deactivated the safety switch- both of which would have been caught by a home inspector. Although Lynne and her husband weren’t injured, they ended up having to fork out $3,000 for a new unit. “Who’s got that kind of extra money lying around right after their honeymoon?” she says. Lynne was upset with her agent for misguiding them, and she was even more upset with herself. “I ignored my gut instinct and didn’t get the inspection when I knew I should have. Now I always tell people, ‘Whatever you do, don’t let anyone convince you not to get it done.'”

Home inspection how-to Check with the Canadian Association of Home and Property Inspectors to find a regulated home inspector in your area who has met the provincial or regional association’s certification requirements.

Accompany your inspector while he examines your home- this way you’ll be sure to understand what he’s referring to in his written report, which you should get within 24 hours of the inspection.

Lynne saw flames shooting out of the air-conditioning unit. “I ignored my gut and didn’t get the home inspection.”

Lesson #2 – Take your time

When first-time homebuyer and Montreal resident Lauren Brown bought a house, she spent only a week searching. She and her husband had seen just a few homes on their own, and when their agent pressured them into making an offer on the first house he showed them, they did. “My gut feeling was to say no, and I should have listened to it,” Lauren says. “It was too soon, but every time I presented an argument that we should see more houses, the agent would tell us that other purchasers had visited the house we were considering and we would miss out on the opportunity if we didn’t act quickly.”

So Lauren and her husband ended up buying a house they couldn’t really afford, and with their mortgage payments sucking up too much of their income and interest rates climbing, Lauren knew they were in deep trouble. “It was very stressful, and I really started to resent the house. We eventually had to sell it because we just couldn’t afford it.” Aside from the financial strain the house caused, it also took a heavy toll on Lauren’s marriage. “There were other factors, but I’m certain the stress associated with the house contributed to our decision to separate,” she says.

So when Lauren, now a single mom, decided to buy again 12 years later, she wanted to do everything just right. She found a great agent, and instead of being pressured to decide on a house within a week, this time her search went on for nearly a year. “I wasn’t in a rush, so taking my time wasn’t a problem,” she says. Finally, she found the perfect house. “It had everything I wanted, and it was just the right price. I was glad that I trusted my instincts and didn’t settle this time,” she says.

Limit your agent and your spending: Only sign on with an agent for 60 days at a time, says Ozzie Jurock, a Vancouver real-estate expert. That way, if you feel the agent’s not the right fit, you can move on.

Get pre-approved for a mortgage before you start seriously searching, says TD Canada Trust residential mortgage manager Ramy Ibrahim in Toronto. That gives you a clear idea of what you can afford so you don’t end up overspending.(But remember, he cautions, pre-approval isn’t a guarantee for approval. It’s a snapshot of your financial situation at the time, and it’s subject to change.)

Lauren and her husband ended up buying a house they couldn’t afford. When interest rates shot up, they knew they were in deep trouble.

Lesson #3 – Get ready for war

Toronto residents Lyndsey and her partner, Tracy, hunted for the perfect house for nearly a year- and they found it. Six times. But every house they tried to buy ended up going to a higher bidder. “You start to feel as if there’s a pit in the bottom of your stomach whenever you go to make an offer,” Lyndsey says. “I tried to stay positive, but I was frustrated.”

The couple’s situation was not unique: in hot real-estate markets- such as Toronto and Vancouver- bidding wars are all too common. The trick to winning one, says Helga Teitsson, a Toronto-based associate broker, is an unconditional offer. Sellers can get stressed when they see an offer riddled with conditions- they worry that if the conditions aren’t met, the deal will fall apart. So they’re often more receptive to unconditional offers that are firm and binding.

In most of the cases, Lyndsey and Tracy were outbid by $30,000 or more, putting the prices of the houses way out of their range. And that’s what they expected to happen when they viewed a great house on a decent-size lot with- a bonus- two bathrooms. The couple decided to bid, but it was a little half-hearted. “We honestly believed there would be so much competition that there’d be no way we could afford it,” says Lyndsey.

But Lyndsey and Tracy were pros by this time- their fourth house- so they knew all about submitting a clean offer. They had their financing already in place, made no demands as to when they could take possession and- an extra point on their side- submitted a certified cheque as a deposit(the larger the sum, the better, advises Teitsson). The one thing Lyndsey and Tracy did not do was a pre-offer home inspection- instead, they made their offer conditional on the completion of a future inspection. “We just thought there was no way we’d get the house, and we did not want to waste money on a pre-offer inspection,” says Lyndsey.

On the evening that the seller was accepting bids, Lyndsey and Tracy stayed home, convinced their bid would be laughably insufficient. They were surprised when their real estate agent called a couple of hours into the evening. “She said, ‘They want everyone to do better,'” says Lyndsey. “We’d never heard that before.” So they upped their bid and waited. “I was excited,” she says. An hour later their realtor called again, this time with bad news: “She told us we didn’t get it. And a day later she told us we’d only lost by $2,500. We realized that if we’d had no conditions, specifically the home inspection, we could have had another shot and maybe won the house,” she says. “Sellers prefer going with a sure bet.”

Cut the conditions If you live in a hot real estate market, make your offer as condition-free as possible (go with a pre-offer home inspection). One condition Teitsson often includes, though, is that the sellers provide a warranty that all heating, cooling equipment and appliances are in good working order.

Don’t make any demands about the closing date. A seller will be less likely to accept your offer if you want to move in sooner than he wants to move out.

Lesson #4 – Know who your lawyer is

Three years ago, Adam* decided to refinance his mortgage to take advantage of lower interest rates. He filled out the forms, got approved and didn’t think about it again. But when he got a call from his bank a few days later telling him the legal paperwork associated with the purchase of his house in Toronto was botched, he was shocked. Not only did he not have clear title on the house- which means the property wasn’t completely free of claims and he didn’t own it legally- but it was registered to a dead man and the legal description of the property was wrong.

The bank wouldn’t process his newly financed mortgage until he’d sorted out the legal mess. So Adam tried to reach the lawyer- recommended by a friend- who’d handled the transaction. But days later, after several calls, Adam wasn’t able to contact him. Frustrated, he got on the phone with the group that oversees Ontario’s lawyers and found out his lawyer was under suspension, and not for the first time.

Stuck without legal advice, Adam got in touch with his mortgage manager, who recommended he retain the bank’s attorney. Finally, six weeks- and a thousand bucks- later, Adam had new financing in place and all of the legal information associated with his house was accurate. “I’m lucky that I was just trying to refinance my house,” he says. “If I’d been trying to sell it and all of these issues surfaced then, it could have cost me a sale and thousands of dollars.” His advice? Don’t rely strictly on referrals from friends. “Just because a guy’s a lawyer doesn’t mean he’s a good one. Remember that D student in law school? He’s practising like anyone else.” And go for title insurance, which protects homebuyers against losses arising from problems regarding the title of their properties. Adam skipped it on the advice of his original lawyer.

Find the right lawyer It’s important to choose a lawyer who focuses on real estate, says Toronto-based lawyer Brian Taran. You’re more likely to get proper service if you deal with a lawyer who specializes in real estate rather than one who’s trying to make a few extra bucks on the side and who doesn’t deal in this area on a regular basis.

Don’t be shy about asking for references. A lawyer’s running a business like any other professional and he should be prepared to discuss fees and provide references. And get in touch with the law society in your province to find out about any previous disciplinary decisions against him.

* Name has been changed.

More dos and don’ts

For the buyer

Mum’s the word Keep a poker face and stay quiet when you’re looking at a home and the sellers, or their agent, are there. Negative comments will just insult the sellers, and showing excitement won’t help your case when it comes time to put in an offer.

Don’t sweat the wall stuff Try not to be discouraged by a bit of peeling paint, cracks or holes. Damage that isn’t structural is easily fixed and makes a huge difference.

Budget for extras Normally, realtors advise you to budget up to two per cent for closing costs, but when you buy property in a new development, you may be charged additional fees such as meter installation and sewer service connection. These can add unexpected costs.

For the seller

Make sure the price is right Sellers tend to overestimate what their houses are worth. Just because the house down the block sold for a bundle doesn’t mean yours will, too. Do your research, then consult up to three realtors. If you’re not satisfied with the realtors’ advice, move on to a professional appraiser.

Close the zoo. Not everyone viewing your house will love your dog, cat or ferret as much as you do. And pets can be a distraction. Take them out of your home, if possible, when buyers come by, especially during an open house.

Bake sale Leave out a few “hospitality treats,” such as coffee and cinnamon buns, for prospective buyers. Even if they don’t eat them, the scent of fresh-baked goodies wafting through the house can make your house feel cosy and inviting, leaving a lasting impression.

First published in Chatelaine’s October 2005 issue.
© Rogers Publishing Ltd.

It’s not surprising that some homeowners confuse the terms “second mortgage” and “home equity loan.” After all, a second mortgage is a type of home equity loan. But more often than not, home equity loan is used to describe a home equity line of credit, or HELOC. If you want to take advantage of the equity that you have built up in your home, you will need to decide if a HELOC or a true second mortgage is best for you.

Before discussing which might be better for your purposes, let’s look at some of the basics of each. A second mortgage pays out a fixed sum of money to be repaid on a set schedule, like your initial mortgage. Unlike refinancing, the second mortgage does not supersede the first mortgage. Second mortgages are usually 15 to 30 year loans with a fixed rate of interest. Like the initial loan, the rate of interest and points (if any) will be based on your credit history, the price of the home, and the current interest rate. While the interest rate on a second mortgage may be a little higher, the fees are generally lower.

HELOC, however, is similar to a credit card, and it may even include a credit card to make purchases. Like credit cards, interest is charged, and the amount you can borrow is based on your credit worthiness.

To determine the limit of your HELOC, lenders will look at the appraised value of your home, you may have access to up to 80% of the appraised value or purchase price of your home (whichever is lower), less any prior outstanding mortgage charges. As your mortgage balance decreases, your available rate increases.

Your current financial needs will help to determine which type of loan is right for you. If you need money for a one-time expense, such as building a new deck or paying for a wedding, you would probably opt for the fixed-rate second mortgage.

But if you forecast a recurring need for extra money, such as tuition payments, you may prefer a HELOC. A line of credit allows you to borrow when you need the money and, if you pay back the amounts quickly, you can save money over a second mortgage. You also need to consider your spending habits. If having another credit card in your wallet would temp you to spend more often, then you are not a good candidate for a HELOC.

Once you make an initial determination about which loan might be right for you, you will need to discuss the details with a professional. We recommend that you speak with an independent mortgage broker with experience in this sector to help you make the most effective decision among the products available.

Why work with an independent broker?

  • Because they are not loyal to any one financial institution (i.e. like a bank consultant), the options presented will be greater.
  • Independent mortgage brokers scour the market for the best mortgage products – not just those being pushed by a particular company. As the mortgage broker fee is paid by the lending institution, it’s a decision that doesn’t cost you anything.

(Source: AllBusiness.com)

Mark Brennan
Mortgage Broker