Andrew Vaughey, Mortgage Info You Can Actually Understand!

Fri Jan 4 05:46:44 PST 2008

This is a great time to Refinance Your Home or Buy a New Home -- the
Mortgage Rates are so low, these days! It's always worth a shot to find out
what the costs of switching over to a new mortgage would be, to see if
that's the right move for you.

Whether you are building your own house, buying a new property, gathering
funds to do a renovation project, or Refinancing your current Mortgage at a
much Lower Rate, you'll be looking for Funding -- Money, Money & More Money!
Here are some commonly asked questions regarding funding for a Mortgage or a
Home Improvement Loan.

Where should I go first to get a Mortgage?

You can go to the Loans Department of your regular bank, or you can go
directly to a Mortgage Broker. (Click on the Mortgage Company Ads on
www.buildyourownhouse.ca to see if that's the easiest way for you to get the
money you need... At the very least, it'll tell you how much you're
qualified for, and the on-line Lenders have Rates the Banks have a hard time
competing with. It's all about Saving Money, so check into it all, first --
it's a big financial decision! You can always take your information you've
gotten On-line to the Bank -- if they can't or won't match it, there's your
decision right there! ha,ha!).

Keep in mind that it is generally easier to work with a Broker, since they
have the ability to be a lot more flexible than a conventional bank. Also,
their rates will often be considerably lower than what the banks are
offering, too, so shop around – this could save you a fair bit of money.
Brokers can often get a mortgage for clients that a bank won't even touch,
and they'll do it at your convenience, for the most part, so you can have a
more relaxed meeting with them.

What questions will a Broker ask somebody who's looking for a Mortgage?

There are three main things you will be required to provide:

i.Verification of Income

ii.How much and where the Down Payment is coming from

iii.Personal information for Credit Checks (Birthday, Social Security
Number, Address, Job Letters, Pay Stubs, 3 years worth of Tax Returns, 3
months worth of Bank Statements, any current Retirement Savings Funds... )

Your Banker or Broker will want to confirm your ability to qualify by doing
a GDS Ratio (Gross Debt Ratio) and a TDS Ratio (Total Debt Ratio).

A Gross Debt Ratio is determined by taking the Mortgage Payment, the
Property Taxes, and a Heat Component (really hot areas will be exempt from
this, I'm guessing!), which is usually around $50.00. These numbers are
added together. That number is multiplied by 12, then divided by your Gross
Income Amount. This number can't exceed 32% of your Gross Income. Some banks
&/or brokers may have different criteria, but this is a commonly used method
to see if a client can qualify for a mortgage.

The Total Debt Ratio takes the above information (the GDS Ratio) along with
all other debts and payments (whatever else you have to pay per month –
credit cards, support payments, etc.) to make sure that the Grand Total of
all of your payments, including the new mortgage and taxes, won't exceed 40%
of your Gross Income.

N.B. Don't get too hung up on the math – that's the job of the banker or
broker. This is just info to give you a good understanding of how they get
their numbers.

What if someone has a job that is technically referred to as "Part-time",
but they make a "Full-time" wage. Can they qualify for a Mortgage?

You can apply through a Mortgage Broker (probably your best bet) to see how
much your Gross Income will allow you to qualify for. It is particularly
beneficial if you have a solid work history (have been at the job for a few
years, or more). A Broker will know how to present the documentation to help
you get a mortgage. This is particularly important, now, since so many
companies and Government Services hire 'Part-time' or 'Contract' employees.
These can be career positions, and you can be there for fifteen years, and
still be flatly turned down by the regular banks. Don't give up on your
dream to own your own home because you're in a situation like this – call a
Mortgage Broker, and give it a shot. If that still doesn't work, try another
one. What's the harm? At the very least, you can get an honest answer of
what you need to do in order to become qualified. Either way, you'll be that
much closer to owning your own place, and that's the goal!

Is there an easy way to calculate a Mortgage?

There's a formula that I use that is relatively accurate, give or take a
hundred dollars, or so. At the very least, you'll get a ballpark idea of
your monthly payment (not including the Tax portion), and whether you can
qualify for that amount. Remember that when you're qualifying for Mortgage
money, if you're even $80.00 over what they think you can pay, you won't get
the mortgage. It's best to Pre-Qualify for a mortgage, and ask how much you
will qualify for before you go house-hunting. Keep in mind that as the
Interest Rates get lower, the more you'll be able to qualify for. Don't go
crazy, though, since all the costs go up as you increase in house size, and
the monthly operating costs might end up being higher than you thought, then
you've got a big house and a crappy lifestyle. Stay within your means; stay
happy and comfortable.

The Formula – remember, it's a ballpark number...

On a 25 year Term, you would take the Percentage Rate (say, 5%) and multiply
that out by the number of thousand (say, $100,000.), which would give you a
mortgage payment of about $500./month (5 X 100 = $500.), plus Taxes. So if
you've found a house for $165,000.00, and the rate is 5%, (based on a 25 yr.
Term), the payment would be around $825.00, plus taxes, per month. (5 X 165
= 825)

We use this formula all the time – it's functional to see if you can even
come close to being able to afford a particular property. If you always find
yourself looking at the properties worth $300,000., when you can actually
afford a $75,000. property, do the math, figure out what you can really buy,
and get that. It's better to buy something already in your range, save your
money, wait until your place has gained in equity, then make the move up.
Have your Broker or Banker let you know how much you can spend, and have
that up-dated every year, or so, depending on how long it takes you to find
a place to purchase, especially when the rates are fluctuating so much.
Also, your Broker will tell you the exact payment.

Can I qualify for a Mortgage based on the lowest rates out there?

Different Lending Institutions will have different rules, but you will
generally have to qualify under their 3 Year Rate, which will be higher than
the lowest rates available. Some institutions will use the 5 Year Rate
(primarily regular banks).

What's the difference between an Open and a Variable Rate Mortgage?

An Open Mortgage is one that can be paid out at any time, but you will pay a
higher Rate for this privilege. This is a good choice if you're not sure how
long you'll be staying in the home. You'll save on the possible Penalty
Payments you would have to pay if you had a Fixed Rate Mortgage, and had to
move before the pre-chosen Time Period had elapsed.

A Variable Rate Mortgage (my favorite!) is not fully Open, but it can easily
be converted into an Open Mortgage, so you would still save on any potential
Penalty Payments. With this Mortgage, you'll usually get better than Prime
Rates, and the flexibility to move if something better comes along... ! The
other thing I really like about this one is that you can usually make
payments directly on the Principle, which will reduce your mortgage faster
than almost any other method. Your monthly mortgage payment will be as low
as possible, so with the extra money that you might have kicking around, put
it in a Savings Account, then make the payments annually (or more – ask you
Broker how often and when you can pay off the Principle).

One thing about this type of Mortgage that might seem off-putting,
initially, is the fact that the interest rates actually fluctuate within the
mortgage. This is not necessarily a bad thing, especially if the rates go
down after you've established the mortgage. The important thing to remember
is that the amount you pay per month will always be the same – the only
thing that changes is the amount that will come off the Principle. If
interest rates start to rise, make an extra effort to set aside some money
to pay directly to the Principle.

My biggest Financial Pet Peeve is the whole notion of making two payments
per month (or Bi-Weekly Payments) that are really high in an effort to pay
off the Mortgage faster (usually a 15 year term). This drives me crazy,
since it often puts a lot of unnecessary financial pressure on a family.
That's a lot of money to come up with in a month, and if disaster strikes,
they'll be in serious trouble very quickly. I always think that it's better
to establish the lowest possible monthly expenditures, then if you still
have a big wad of cash left over, great – put that toward the mortgage.
Using the Variable Rate Mortgage will give you the lowest mortgage payment.

Here's a quick example: If you have a mortgage of $100,000. @ 5% (using a 25
Year Term), using the Variable Rate Mortgage, your monthly payment would be
about $500/month, plus taxes. If you have the same mortgage in a Fixed Rate
Mortgage (also a 25 year term), @ 6%--remember that the Variable Rate is
lower – the monthly amount would be about $650, plus taxes. (Note that a
Fixed Rate Mortgage is calculated differently from a Variable Rate Mortgage)
If you were to sign up for the two-payment a month plan, that's $1300/month.
The spread ($500/month to $1300/month) is $800. Multiplied out by a year is
$9,600 – that would be a huge Lump Sum Payment directly on your Principle.

Keep in mind that only a tiny amount of your regular monthly mortgage
payment goes toward the Principle in a new mortgage – have a good look at
your Statement, the next time it comes in. Even if you were to put half that
amount on the Principle, you would still be making a major dint in it. And
your financial life won't be so stressful, which will make the rest of your
life much nicer, too, since financial stress is one of the leading causes of
divorce, but that's a whole other story...

What's a Fixed Rate Mortgage?

A Fixed Rate Mortgage is a mortgage that will have the same rate for the
amount of years you have chosen to lock in at. Typically, there are 1 Year,
2 Year, 3 Year, 5 Year, 10 Year, 15 Year, and 25 Year time periods. If you
choose to move before the time period is up, you will be required to pay a
Pay Out Penalty, so keep that in mind if you're not completely sure how long
you'll be there.

What's the best way to get money for a Home Renovation Project?

Check first with the Financial Institution that's carrying your Regular
Mortgage. They may be able to provide the money you need to renovate. You
could borrow on your Equity (the spread between how much you owe for the
property and its current appraisal rate) in the form of a Home Improvement
Loan or a Home Equity Loan. Keep in mind that you can use a Home Equity Loan
for other stuff, as well. Your bank should be able to offer you a Blended
Rate, and should waive the Pay Out Penalties. If they won't offer that, or
give you any loan, call a Broker, and see what they can do. They're not
miracle workers, but they can often help when the regular route won't come
through for you.

The easiest way these days is to check out companies on the Internet. You'll
get your response a lot faster, and probably get a better rate, too! I'll
find some for you and post them here!

The bank wants to do an Appraisal on my house before they'll give me a Home
Improvement Loan. Is that standard?

Yes. (You'll need this for the Home Equity Loan, too.) The financial
institution needs to know the current value of your home to make sure that
their backs are covered. Makes sense. You will probably have to get a
'Before and After Appraisal', quotes from the respective contractors to show
proof of renovation, and a description of the type of renovations you're
planning. It's much easier to borrow against the Equity, so try this route,
first. Talk to your Lender before you get too involved to see what you can
actually get, and when. If you have to pay for the whole job out of your own
pocket first (as is often the case, which is craaaazy, since if you had the
cash just sitting there, you wouldn't be at the bank, anyway... .ah, the joy
of financing!), make sure that you find a source for material that will
provide a payment plan (many home improvement stores will do this), and a
contractor who doesn't mind being paid at the end of the job when you're
money comes in.

N.B. Just a little aside – I've seen some 'warnings' out there that you
should nevah', evah' pay your contractor up front or in the middle of a job,
or only pay them when you are 'completely satisfied'. Please. There are some
people who are never satisfied with anything, even if they get exactly what
they requested. This is such complete crap. You would never work for an
employer for a year, then at the end of that year, he would sit back and
decide whether he should pay you. That's crazy. Be smart about it, though.
Get everything in writing, both of you agree to it, then sign the quote. You
will often be required to pay for materials up-front, since the contractor
doesn't know you anymore than you know him... Generally, you will make
payments as the work progresses, which is easier than getting one big bill
at the end, but if you have extenuating circumstances (like the bank won't
give you the money until the end of the project), then tell your contractor
that at the beginning. All projects work more smoothly when there's open and
complete communication.

How do you get a Builder's Loan?

Apply for a Builder's Loan the same way you would apply for a regular
mortgage. If you are a new Builder, you may require a 'New Home Warranty' on
the property. That's pretty difficult, if it's your first house, so you may
be calling a Broker right away! They're usually more flexible in getting you
the capital you'll need to bring the house to fruition, but if you already
have a good relationship with your banker, give them a crack at it. This
might be easier in a rural area, where it is more common for people to build
on their own, so the financial institution will already know how to manage
this scenario.

When will we get our money?

The money is separated into 3 or 4 sections, or 'Draws'. Generally, you will
get the funding in Three Stages:

i.Sub-floor

ii.Lock Up

iii.Completion

Can we get money to get to the Sub-floor Stage?

This is where careful and creative financing comes in... hopefully, you'll
have that swack of cash in the bank (at least twenty thousand), and a fair
bit of equity in your home. You'll probably need to sell your current
property before you start building your new house, so you can use the equity
spread from that sale to get the new house started. If your land is already
paid for, you'll find this stage easier. Some Developers will allow a new
builder to put 5% down on the land, then they can pay the balance when the
mortgage money comes in. This is relatively rare, so if you find this deal
and like the location, go for it.

Talk to your Excavator, Foundation Contractor and Framer to see if you can
make partial payments until the First Draw comes through. They're in the
business, so they'll understand your situation. A lot will depend on how
busy they are and the relationship you establish with them. Some Suppliers
(lumber, ICF Blocks, etc.) may have a payment schedule, too, so it doesn't
hurt to ask if you need to.

A Personal Line of Credit from the bank, along with your regular credit
cards (again, if you have an Air Miles credit card, now is the time to use
it -- you'll really rack up the points, then you can take a well deserved
trip at the end of your house-building adventure!), personal loans, etc.
will all come into play, now. You might want to make sure you have an
alternate source of funds for a 'just in case' scenario. It's best to plan
out all the possibilities before you get started so that nothing will catch
you off-guard.

What kind of Appraisals will the Bank do?

First, the Appraiser will inspect the Land, the House Plans, and your
Proposed Budget. The amount of money provided for the Builder's Loan will be
based on the Cost to Complete the house, not including the value of the
land. The Land will be included with the final appraisal for the Completion
Mortgage (Take Out Mortgage).

The Appraiser will come out to your property to do Progress Inspections at
the Three Stages – Sub-floor, Lock-up and Completion. You should anticipate
a one to two week waiting period for the Draw Money to come through. During
that time, the bank will most likely have a lawyer check the Title each
time.

It's an involved process, but it does work, so stick with it and figure it
out! Remember that if one institution can't get you the money, try a Broker
or two... eventually, it'll all work out!

One more thing -- What is Escrow??? I know, you hear that all the time! It's
that seemingly very long period that your Lawyer holds onto your money while
all the conditions are met on the House Deal. Make sure you ask your Lawyer
for a good idea of the time-frame you might expect, and be sure not to leave
yourself too tight (moneywise!) during this annoyink period!

Just so you know, a Real Estate Lawyer will be very pleasant to deal with
... they don't seem to deal with a lot of animosity, like many other types
of Lawyers, and that probably accounts for their serene expressions!
ha,ha,ha! They're there to help you get into or out of your home, so don't
worry -- it won't hurt a bit!

Ailsa Forshaw is a Writer, Builder, Website Owner & Manager, Teacher,
Mother... all in Alberta, Canada. She is Married with Two Lovely Children,
and one gorgeous wee dog. Her Website, , is chock full of all sorts of
useful & fun information to help anyone become Financially Successful, Slim,
Trim, and Happy... what more could you want?? Pop in for a wee visit!