When most homeowners are thinking about refinancing or renewing their mortgage the first thing that comes to many peoples mind is the interest rate. Most people are curious about what the best interest rate is, and although this is an important part of the mortgage it is not the only important element. In this article I will attempt to illustrate a few important factors you should consider when shopping for a mortgage, as well as show homeowners how to avoid some common pitfalls.
As I stated above the interest rate is an important element of your mortgage, however, don't let yourself be fooled by banks that advertise a teaser rate. A teaser rate is when a bank offers an unbelievably low interest rate for only an introductory period and after that period is over the rate goes up dramatically. Many people are fooled by this tactic, because the rate seems so good compared to what most banks offer. You think it is a good deal but without calculating the actual cost using a financial calculator you really don't know for sure. These teaser rate mortgages almost always cost you more money.
It is important to consider your personal needs when shopping for a mortgage, for instance if you are a homeowner and you decide to refinance your home to pay for one of your children to go to school it makes a lot of sense to borrow from your equity. However, what if you have another child who will be leaving for school only one year later and you will need to borrow again. In this situation it would not be wise for you to lock into a five year term, even if the rate is good. You will have to pay penalties to break the mortgage, and that can end up costing you thousands more than an open mortgage with a slightly higher rate that would allow you to break it without a penalty.
Another consideration in a mortgage is the compounding of interest. What compounding means is when the bank charges you interest on your loan they calculate how much interest you owe at different periods of the loan and then they add that amount to your loan, so that you are now paying interest on your interest. This is done at different times and for most banks it is done once every six months (or semi-annually) however, some banks do it every month. If you have two mortgage offers from two different banks and they are both offering the exact same rate but one is compounding the interest semi annually and the other is monthly, the one that is semi annual is actually much cheaper.
The examples that I have mentioned in this article are just a few of the mortgage options that are available, with all of the different alternatives accessible to consumers it can be very confusing. So how do you sort through all of these options? The answer is simple, you don't. It is always in your best interest to consult an independent mortgage professional who can sort through all of your choices and help choose the right mortgage for you. Many people think that a mortgage specialists only goal is to help get you the best rate, and although they do help you find the bank with the best rate it is never the only consideration.
