Not a month goes by without major news about mortgage rates rocking the Canadian real estate market. While it is true that mortgage rates are a crucial factor where home buying is concerned, it is even more important for people to fully understand exactly how these rates work, and how they affect home loans. So, what exactly are mortgage rates? Well, read on to find out.
Understanding the basics of mortgage rates
Mortgage rates are interest changeable on a loan to buy a home. For a majority of people in this country, obtaining a mortgage is an important part of their home buying attempt. Mortgage rates are based on the principal balance of a home loan, meaning the amount of money still owed before the loan amount is fully repaid. Mortgage rates are typically more costly at the beginning of loan repayment duration due to the higher balance amount. As the borrower continues to pay off his loan, the remaining amounts attract less interest.
Higher mortgage rates mean that more interest is able to build up, something that makes it harder for the borrowers to fast pay off their loans. And since a lot of money is being put toward paying off the interest, it gets even harder to lower the actual balance of the loan. This is how some homeowners end up with seemingly never ending mortgage payments – almost throughout their life.
How are mortgage rates determined?
Mortgage rates offered by lenders depend on several factors. Nevertheless, the main factors are consumer sales, whether it is bond yields, employment and market conditions. Mortgage rates also are dependent on individual’s personal financial circumstances. For example, mortgage loan borrowers with good credit scores normally get lower rates compared to those with poor credit records.
Mortgage rates also can be reduced by specific provisions included in a home loan contract. Paying points in this case result in low mortgage rates. A point refers to the interest that borrowers can pay off upfront. While a point can cost more money in the beginning, it actually ends up saving the borrower a significant amount of money because interest does not build up on the actual mortgage balance.
Another way to lower the mortgage rate for the borrower is to invest in a higher down payment. More money paid upfront means lower risk for the lender. This in turn means that the lender can afford to give the borrower a lower amount of interest on the borrowed money.
Top 2 strategies for paying less interest on your mortgages
Hire a mortgage broker
This probably is one of the best ways to obtain lower mortgage rates in the market. Mortgage brokers are experts whose main job is to bring together the lenders and the borrowers. These professionals have a wide network of contacts they use to find suitable home loan products for individual borrowers depending on their specific needs. Apart from this, mortgage brokers have access to hundreds of lenders that the borrowers would otherwise not think to do business with on their own due to a wide range of different reasons. This often results in lower mortgage rates than those offered at the borrower’s local banks.
Settling on a shorter amortization period
Opting for shorter amortization period also can result in less money spent on mortgage interest. The period of time a borrower has to repay the money he or she borrowed is referred to as the amortization period. The longer an amortization period, the more time is allowed for the interest to build up. A shorter repayment period results in less money being paid at the end of it all. Nevertheless, this also means higher monthly payments as the borrower has less time to repay the entirety of the loan. All in all, this repayment strategy in actual sense ends up saving money for the borrower in the long run.