credit score

Why The Best Mortgage Rate May Not Always Be The Lowest

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Mortgage Rates London Ontario

Just like when looking for a car, it isn’t always the best option to choose the cheapest one you find, it is the one that is best suited for you and your lifestyle. So just like when looking at mortgages, choosing the one with the lowest interest rates might not be the best option for you, as it could end up costing you more.

How can it cost me more?

One of the reasons why some of the interest rates are low, is that they come with restrictions and sometimes aren’t that flexible. While lenders can entice you with low fixed rates, they might be able to get that money back further down the road with penalties and fines if you were to adjust or change your mortgage. This is not an uncommon practice, similarly insurance companies do this by offering us less for insurance but charge us a higher deductible if something were to happen with our car.

Just like interest rates with additional features and flexibility, these can cost a bit more than a fixed, low interest rate. By paying a little bit extra in interest rates, you can have a little bit of breathing room when it comes to an unexpected change in events and you may need to change your mortgage.

Some Considerations

Here are some questions you should ask yourself when you consider locking in your next mortgage:

  1. What if I need to refinance due to an unexpected job loss, break-up, unexpected home repairs, etc.?
  2.  Can I put extra money down to pay off the mortgage? If so, how much and when?
  3. Are my closing dates flexible? What happens if they aren’t?
  4. What if I move and sell my house before the mortgage is up?

So, what is the best rate?

Life is unpredictable! We may not be able to foresee our future, especially when signing our first mortgage. A no-frills, low-interest mortgage that can end up penalizing you for adjusting or breaking your mortgage can be devastating! The last thing you want is to be penalized a substantial amount on fees and penalties in unexpected charges.

We’ll sit down with you and go over your present situation, as well as discuss your future needs. We can go over all the options available and choose the best options that will suit your needs.

 

Keep Your Credit Score High While Shopping for a Mortgage

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Here is a breakdown of common credit score terms and a few tips to help you improve your credit score before you apply for a mortgage.

 

Credit scores in Canada are used to measure a borrower’s credit risk based on their financial history. This includes details with credit cards, loans, mortgages, credit and payment history. The higher your credit score, the lower the interest rate will be. Having a favourable credit score is a factor in this and it also makes it easier for individuals to get credit cards and loans on favourable terms. It is wise to start working on that credit score early, so you can reap the benefits of it later.

 

There are three private agencies that generate credit scores – Equifax, Trans Union and Experian. all 3 bureaus offer FICO (Fair Isaac Credit Organization) credit scores using the formula developed by Fair and Isaac.

 

Tips on keeping your credit in check

 

Review your credit report at least once a year.

 

Contact your creditors or send letters to the credit reporting agency to have errors on your credit profile corrected.

 

Apply for credit only when you need it.

 

Keep balances below 50% on your credit cards.

 

Pay off non-mortgage debt on time as quickly as possible. If your debt levels are high, try to set up some sort of payment plan to reduce your balances or look to consolidate this debt.

 

Remember to not close accounts, even if they are not used – you can lose valuable points by doing this in the current evaluation system.

 

Do Inquiries hurt my credit score?

This is a common misconception, that every time you check your credit score the score will drop. Inquiries may have an impact on those with very limited credit history and on late payments.

How Your Credit Score Can Affect Your Mortgage Rates

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A strong credit score and a reasonable debt ratio are equally important when it comes to getting the best mortgage rate and terms.

 

Your credit score is a number between 300 and 900. A credit score above 700 means you manage your credit well, meaning a lender should feel comfortable letting you borrow money. A strong credit profile and reasonable debt to equity ratio are both important factors if you want the best mortgage rate and terms.

 

People tend to focus on their credit score, as it is an important factor, however lenders do not stop there. lenders look at many factors when they consider an application for approval. They review your credit scores, the property that you are looking to purchase and your source of down payment just to name a few. It is not necessarily whether one is more important than the other, as it is dependent on all factors considered.

 

The lender wants to know that you make enough money each month to cover your bills and expenses.  Of course, the above ratios and limits are only guidelines. Still, to keep your credit score in a healthy place, consider the following four factors:  

  1. Pay your bills on time
  2. Keep your credit utilization under 60%
  3. Have a mix of loans and credit cards if possible
  4. Limit the amount of credit inquires you have. If you don’t need it, don’t apply for it!

A great credit score will be beneficial  when it comes to mortgage rates.  So great credit utilization is a key Let’s use an example. Say you have a credit card with a limit of $10,000 on it. You want to keep what you borrow to less than 60% of that limit or no more than $6,000 at any one time.

 

The key here is to use two to three credit vehicles (credit cards or loans). These help build your credit history, which is something most lenders want to see. When using these credit vehicles, make sure to not extend your credit utilization over 60% on each line of credit or loan.

 

Some helpful tips to help improve your credit score:

  • Establish a long credit history. Try not to cancel your oldest credit card, even if you rarely use it. The longer the credit history you have, the better
  • Always pay your bills on time and always pay at least the minimum payment as requested.
  • Note that checking your own credit score will not affect your credit