Ten Costs to Consider When buying a House.

There's a lot of things to consider when you are looking at 'moving on up' in the world, or even just 'moving across the street'. Here are 10 things. You may overlooked one or two.

Balloons help in every situation. 

Conventional vs. Collateral Mortgages

What's the difference? I asked one day. Big mistake. There's a big difference. Like Cool Fonzie Vs. Cool Batman difference.

Not Cool-a-mundo...

CONVENTIONAL MORTGAGE -

If you are the average, hard-working, beer-swilling, Tim Horton-eating Canadian with a steady paycheck and looking into purchasing your own home you will most likely getting a conventional mortgage. Most people you know have a conventional mortgage. It's basic. It's simple. You know your monthly payment amount, your rate of interest, the length of your term and most important when it would be paid in full.

For example; You bought a nice home for $200,000. You saved up enough to put the minimum 5% down and so have a mortgage of $190,000. You are paying 3.5% interest and after 5 years your mortgage will be up for renewal. Keeping at the current rate, your mortgage will be paid out in 25 years.

Your monthly payments go to paying principal and interest that is calculated over time. At the start of your mortgage, most of your payment goes towards the interest owing with a smaller portion going to principal. As time goes on, the payments go more towards principal than interest.

You can 'switch' or 'transfer' your mortgage to another lender at any time (with a penalty) OR you can wait until the end of your term, at which point you can switch lenders at no cost to you.

Don't worry that his office is a Public Men's Room... 

COLLATERAL MORTGAGE

Collateral mortgages are great for 2 reasons. Neither of them are beneficial to you. They keep you from switching lenders and can be used to pay off outstanding debts owed to other lenders, without your consent.

A collateral mortgage is basically a loan agreement secured by the mortgage against your home. Several lenders will offer to have your mortgage registered for up to 125% of it’s value. So, if you have a house that's worth $200,000 you can register a mortgage of $250,000. You won't get that, but it allows you to borrow against that supposed equity without having to resubmit a new mortgage application.

BUT if one day in the future you wish to change lenders a registered collateral mortgage makes it very difficult and expensive. It's how banks keep customers by effectively holding your mortgage for ransom.

Also, if you have a collateral mortgage and you have defaulted on another loan or credit card, a lender can use this collateral mortgage to pay out your other debt.


and KISS or Keeping it Simple Simple.


You have a collateral mortgage at Big Bank because you needed to use the future equity in your home for emergency repairs. Your house is worth $200,000 but your mortgage is $250000. You default on your Big Bank Credit Card, as interest expenses haven't allowed you to pay the balance down and you owe $20,000. Big Bank sees you have a collateral loan and so uses that extra 'equity' in your home to pay off the credit card with no authorization needed from you.

OR you want to move to a credit union because you like the concept and so when you try to switch your mortgage you are told you have to pay off your current collateral mortgage (which may be more than the current value of your home) and then you can reapply for a new one. You really have no choice. You have to stay with your current lender. Sort of like Detroit.

Remember to ask if you are being sold a conventional or collateral mortgage. If you are looking for a line of credit as well as a mortgage, keep in mind this means you will most likely be sold a collateral mortgage and you may be in such a state of euphoria to get that loan you might not hear the smaller details, like that most new homeowners find they sell their first home on average 3 years after purchase.

The interest rate adds 200 lbs. 

The Fear and Reality of Rates Rising

....I read too much....

When will the sky start falling? It's a question put forth nearly every 3 days by some financial expert about the current state of real estate in today's day and age. I read articles constantly about the real estate bubble bursting and unfortunately, none of them are about how to be prepared.
The consensus among those pessimists is 'soon, any day now, like really, it's going to happen, this can't last forever, the real estate bubble will burst.'

But man, doesn't it feel like they have been saying this forever?

I admit I am fairly new to the mortgage broker business. I've never seen a public lender rate at above 6% (which was my 1st house mortage). I can't fathom my parents' mortgage, where they had loans of 11-18% interest. So what's happening?

I'm not financial expert, but here's one thing; Money is not infinite. There has to be balance. This is kept in check by 'inflation'. You may remember discussing this in high school economics or socials class. At one time, governments thought the easiest answer to nobody having money was just to make more. I remember my teacher using Post-Germany WW1 as an example of inflation.

And then I found the Internet using this as an example.

But that was centuries ago! Well, not really. More like only 1 century ago. So this idea of inflation or cause and effect, taken as a moment of time in all known history is relatively new.

Amending a Point About the IRD Buy-out/Penalty

So previously I wrote a definition of the Interest Rate differential (see below w/ classic Family Guy moment). I am going to avoid my opinion on the preference for lenders to call the IRD a 'buy-out' instead of a 'penalty' (which it is, oops). 

Interest Rate differential (IRD) If you wish to perhaps buy out your mortgage as you found a better rate elsewhere or wound up with a lot of extra cash, an IRD is what your bank will charge you for breaking the term's agreement. It handcuffs a lot of owners who may wish to take advantage of lower rates as an IRD can run into the thousands of dollars. Simply put, the IRD can be equivalent to a kick in the balls when you check into how much it would cost to pay out your mortgage.

there's your IRD!

Anyways, the large kick to the balls when you find out that if you wish to take advantage of lower rates will cost you $2000-$20,000 is the #1 reason people stay with their current mortgage lenders. 85% of these people inquiring as to penalties buy-outs are with the Big Banks. They, in turn, are being pro-active in keeping you (their best, loyal contributor to their shareholders) from switching over to a smaller lender that offers better savings.

That's just the interest I'm paying for my mortgage?

YET, is that penalty buy-out enough to stop you from investigating your options?