The most popular subject when talking about mortgages is interest rates. And getting a good rate can make a big difference in your total interest cost. For example, I can currently get 1.75% off the banks posted 5-year rate. On a $100,000 loan, that represents a savings of $8,750. And because you pay your mortgage with "after-tax" dollars, that savings can be grossed up. For example, if you are in the 40% tax bracket, the $8,750 saved is equivalent to getting a $14,583 bonus at work over the same period.
There are a few more things about interest rates that you should know about. Every lender will hold a rate for a period of time while you look to buy a home. This comes with getting a pre-approval. Some lenders' rate hold is only 60 days. That means if you buy a house and set the closing date 70 days later, the lender will not have to honor the rate. If you need more time, up to 120 days is available.
Another potential pitfall is the lender's rate drop policy. Between your approval date and the closing date, will you benefit if the rate drops? If so, are there any restrictions, and when will the final rate be set?
Lastly, something everyone should know about, how is your interest rate calculated? With few exceptions, in Canada mortgage interest rates are calculated semi-annually. What does that mean? All you need to know is, the more often interest is calculated during a year, the more expensive the loan for the borrower. And there is no connection between how often the interest is calculated and how often you make payments. Insist on having this information fully disclosed. It's the law.
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