Monday, February 26, 2007

How to save money on your home loan

How to save money on your home loan(prêt hypothécaire) by Gregory van Duyse

If you are asking yourself how to get the best interest rate on your mortgage, you are asking the wrong question. (For more about that, read How to beat the best rate!). What you should be asking is how do I choose the right mortgage strategy for my particular needs.

How do you find the right mortgage strategy? You can’t. You have to enlist the help of a professional who can create the strategy for you. Why is this? First, you don’t know what interest rates are going to do in Canada. Second, you have have a complete understanding of current and future economic factors. And thirdly, you need to design a strategy that is individualized. For all of this, you need a professional mortgage specialist.

You see, a professional mortgage consultant has the ability to conduct an in-depth analysis of the many options that may or may not suit you. To do this, he has been trained to understand all of the mortgage products available and to choose which one is right in a given situation. In addition, he knows where we are in an interest rate cycle and he can make a better judgement of the probable movement of interest rates over the next ten to fifteen years.

It takes years of study to understand the fluctuations of interest rates and there are economists who specialize in only that. Here is what the layman needs to understand about the basics of interest rates:
Interest rates follow an upward trend for a given period of time, they follow a downward trend for a given period of time, and the remain stable for a given period of time. We have seen this trending in action from 1950 to 1980 when interest rates were rising, from 1982 to 2003, when interest rates were falling and from 2003 to 2006 when interest rates stayed in a fairly narrow range. If you are not familiar with how this works, you will end up paying too much for your total mortgage costs.

Next, you have to understand the rules of interest rates:
Interest rates reflect inflation. If there is an increase in the consumer price index, interest rates should increase.
Interest rates are tied to a country’s economic performance. A strong economy will mean higher interest rates, since there is a higher demand for money, and a weaker economy will mean lower interest rates, since the demand for money will go down. It is also important to understand the rules of interest rates. Interest rates follow two rules, one, that interest rates are indicative of the inflation rate, and two, that interest rates are closely linked to the economic performance of a country. What does this mean? If the inflation rate(the consumer price index) goes up, rates will go up, if the economy is strong, interest rates will go up. (Of course, the opposites are also true.)

Trying to predict interest rates is next to impossible. Interest rates over the last thirty years averaged 9.26%, whereas they are now at about 5%. With this rate, you may choose to take out a 5 year fixed rate mortgage. Remember, by doing so, even without realizing it, you have chosen a mortgage strategy, and this one could be a disastrous one. Refinancing every five years in the recent interest rate environment would have cost a fortune.

Mortgage consultants have a number of mortgage strategies that they structure and customize for each borrower. A professional such as this will look at each option and find the right one for his customer.

The basic mortgage strategies are:
-A five year fixed term loan, renewed five times (5 times 5)
- A 15, 20 or 25 year fixed rate mortgage (Long term).
-A mortgage with an interest rate that varies, based on the Bank of Canada base rate. (Variable rate)
-Deduct interest paid on the mortgage from personal income tax (Smith Maneuver)
-Use the equity in the home to add to retirement income. (More retirement)
-Calculate the difference between saving for a 5% down payment while paying rent and taking out a larger loan and avoiding rent during that period.(No down payment)
-Repair credit using a mortgage in order to establish better credit later on. (Less than perfect credit)

Good mortgage planning and finding the right mortgage strategy in each case is what a mortgage broker will do in order to save home loan expenses, sometime as much as 20 times or more, over the life of the loan.

That’s what a mortgage expert will do when he meets with a client. Each person’s individual requirements and dreams are discussed, and then any mortgage strategies that may be open to him are applied to his situation, under the present and anticipated economic conditions. Not taking these steps with a professional mortgage broker can result in paying too much. A consultation is free, not having a consultation is very expensive.

Gregory van Duyse is an Accredited Mortgage Professional (AMP). He is a Mortgage Broker for Mortgage Intelligence.

Article Source:

No comments: