Using a Realtor to Buy a House is FREE and Highly Recommended.

One of the biggest misconceptions that I come across when working with clients on home purchases is that many people are scared to use a realtor for help because they have heard horror stories about realtor commission. It's important to note that I am not a realtor and I do not benefit from recommending that you use a realtor. I just think it's a really good idea.

Thus, as per the title of this post, please note: realtors do not cost anything if you are BUYING a house.

Whether it's someone you know, a friend of a friend, or a referral, a realtor will help you through the steps of your home purchase so that the process can be as stress-free as possible. Contracts can be confusing and are, of course, binding - so make sure that you're covering yourself before you sign!

Mortgage Renewal and the Importance of Getting a 2nd Opinion before you sign

After you obtain a mortgage, you will not have to do much with your mortgage during its term except, of course, to make sure that you continue to make your mortgage payments.  
 

Near the end of your term (remember, term = the length of time of your current mortgage agreement with the bank), your bank will usually send you a letter or contact you via telephone to ask you if you would like to RENEW your mortgage.  

The date at the end of your term is called the mortgage MATURITY DATE.  

When your Maturity Date gets near, the bank will offer you a term and a rate according to their current rates.  You will not be able to renew using the terms of your previous mortgage term.  In other words, if your interest rate for Term 1 was 3.5% but interest rates are 6% at the time of your renewal, the bank will offer you the 6% interest rate.

It is very important to keep in mind that some banks will NOT offer you their best rates upfront.  Many home-owners automatically sign their renewal notices without giving it much thought. I HIGHLY recommend getting a second opinion from a Mortgage Broker BEFORE you sign your mortgage renewal agreement, as this could save you thousands of dollars.

It is also important to keep in mind that all banks offer different rates.  Some banks are more competitive with their rates, while others focus on other areas of banking.  

The best thing for any person to do is to contact a mortgage broker (like me!) approximately 4 months before your mortgage is set to MATURE.  

A mortgage broker will be able to get you a RATE HOLD for 120 days.  Having a Rate Hold ensures that you will be getting the best rate possible.  For instance, if your mortgage broker secures you a rate hold of 4% and, 60 days later, rates have gone up to 5%, you will still be able to get the 4% mortgage rate.

Again, the most important thing that I can teach anyone about Mortgage Renewal is to always get a second opinion before you sign.  Just like in a relationship, you don’t want to settle or commit until you know that you’re getting the best there is out there!

What is a Mortgage Term?

You will often hear the words AMORTIZATION and TERM used together and we have already learnt what AMORTIZATION is (remember: Amortization Period = the amount of time it will take to pay back the money you borrowed). 

A TERM or MORTGAGE TERM is the length of time of your current mortgage agreement with your bank.  This does not necessarily mean that your Term will be the same amount of time as your Amortization Period.  Terms are generally shorter than Amortization Periods - usually 1-5 years long.  This is because with an ever-changing economy and fluctuating interest rates, it would not be ideal for either you or the bank to lock in for such a long period of time. 

Committing to a Term that is shorter than your Amortization Period ensures that you can keep up to date with current interest rates and are able to get out of your contract if necessary. During an Amortization Period, you may have many different Terms – for example, the most typical scenario for First-Time Homebuyers would be to have a 30-year Amortization and a 5-year Term.  In other words, if you kept renewing every 5 years, you would have 6 terms during the life of your mortgage (5 x 6 = 30).

Once a mortgage term ends, you have a choice to RENEW your mortgage term with your current bank or you can SWITCH/TRANSFER to another bank and enter into another mortgage agreement (more on these two things in upcoming posts).  The new bank will lend you the money to pay back your previous bank.

My Local Recommendations: Financial Advisors/Planners & Life Insurance

If you or anyone you know is looking for more information on Life Insurance options, I highly recommend that you contact one of the following people for further information.  These people are professionals and they will provide you with a variety of options to best suit your Financial Planning and Insurance needs.  As my overview on Life Insurance was very minimalistic, they are happy to take any questions on the subject.

Arvin Jimenez

Advisor – Sun Life Financial

Suite 1900 – 4720 Kingsway

Burnaby, BC, V5H 4N2

Cell: (604) 626- 8447

Fax: (604) 451- 8601

arvin.jimenez@sunlife.com

www.sunlife.ca/arvin.jimenez

Drake Dunn

Dunn Financial Services Inc.

102-20171 92A Avenue

Langley, BC,  V1M3A5

Cell: 604-857-5800

Office: 778-298-1188

Office Fax: 604-513-1170

drake@dunnfinancial.ca

Ron Grey

AJ Insurance

Insurance and Financial Advisor

Ron_Grey@shaw.ca

The 6 Types of INSURANCE: Final Summary

Over the last few blog posts, you have learned about many different types of Insurance that are associated with mortgages and the purchase of a house.  I hope you have been able to follow along but, again, if you don’t fully understand yet, I’ll say it again – you are not alone.  Two instances come to mind when I think about how confusing the subject of insurance can be: 

1.      I remember when I first needed Home Insurance and I contacted my friend who is an Insurance Advisor/Financial Planner to ask him if he could help me. 

·         As we know now, Home Insurance is completely different from Life Insurance, which is what Insurance Advisors and Financial Planners specialize in, so my friend was unable to help me.

2.      I also remember when an Insurance Advisor/Financial Planner emailed me to ask me what “Mortgage Default Insurance” was because I kept posting about it on Facebook. 

·         As we know now, Mortgage Default Insurance is completely different from Life Insurance, so it is of no concern to Insurance Advisors and Financial Planners (it is only a concern to you and the lender).

In other words…don’t feel bad if you have more questions or if you have to re-read the blog posts a few times to understand! 

Here is a short summary of all the different types of Insurance we have discussed:

Category 1: Mandatory

Mortgage Default Insurance – protects the lender if you don’t make payments

Home/Fire Insurance – protects the lender (and you) if anything ever happens to your house

Category 2: May be Mandatory

Title Insurance  - protects the lender (and you) if anything ever happens to your title (ownership)

Category 3: Not Mandatory but highly recommended

Contents Insurance – protects you if anything ever happens to the possessions in your house

Mortgage Life Insurance – protects your loved ones if you die by paying off your mortgage balance

Life Insurance – protects your loved ones if you die by paying your loved ones a lump sum of pre-determined money

Well, there you have it folks – the 6 types of insurance that will likely come up when you start talking about mortgages and, believe it or not, all 6 types are sometimes called the same thing and/or mistaken for one another.  The end.  =)

The Difference between Mortgage Life Insurance and Life Insurance

We're getting closer to that light at the end of this INSURANCE tunnel!  We are now down to learning about the last two types of INSURANCE that you may encounter when dealing with mortgages: MORTGAGE LIFE INSURANCE AND LIFE INSURANCE.

Both MORTGAGE LIFE INSURANCE AND LIFE INSURANCE insure others if something ever happens to you.  Because of the similarity between the names, these two types of insurance are very often confused with one another.  Again, DO NOT get these confused with MORTGAGE DEFAULT INSURANCE. 

The general idea behind both Mortgage Life Insurance and Life Insurance is that you pay a certain amount of money per month and, if you die, your loved ones will receive a lump sum of money.  I am not going to profess to know a lot about these different types of insurance as it is not my area of expertise.  It is best to speak with a professional to go over your options to suit your insurance needs.  I will, however, explain the general differences.

MORTGAGE LIFE INSURANCE, or MORTGAGE INSURANCE, or MORTGAGE PROTECTION INSURANCE, or MORTGAGE PROTECTION PLAN, is generally offered to home-owners by the bank and protects others for the life of your mortgage.  When you sign the mortgage papers to commit to your mortgage, your mortgage broker or bank will include a document offering you the opportunity to buy Mortgage Life Insurance.  The premiums (the amount you pay per month) vary depending on the size of your mortgage and your age.  If you die and you still owe money to the bank for your mortgage, the policy will pay out the remaining balance of your mortgage.  One of the biggest selling points for Mortgage Life Insurance is that your premiums will always remain the same, regardless of how old you are.  However, keep in mind that as you make your mortgage payments, your mortgage balance declines but you will still be paying the same premium amount.

LIFE INSURANCE is offered by Insurance Brokers, Insurance Advisors/Professionals, and Financial Planners.  You can obtain this type of insurance at any time, though it is recommended that you do it close to when you obtain your mortgage so that the value of your property and debt is secure.  Life Insurance can be structured so that, in the event of your death, your loved ones can benefit from more than just having the balance of your mortgage paid off (ie. You can set your coverage to whatever dollar amount you choose).  There are many different options for Life Insurance - for example, there are term insurance policies and permanent insurance policies, and each one can be tailored according to your needs.  In this respect, Life Insurance offers much more flexibility than Mortgage Life Insurance.

Again, I am by no means an expert on Mortgage Life Insurance or Life Insurance – I just wish to explain the general differences between the two since their names are so similar and thus so confusing.  As a general rule of thumb, remember:

Mortgage Life Insurance = offered by the bank and mortgage professionals

Life Insurance = offered by insurance professionals

I believe that it is important for home-owners to have some sort of coverage so that your loved ones will receive benefits in the event of your death.  Your home is your biggest asset and it is always best to be prepared.

If you would like to learn more about your insurance options, I highly recommend that you do a bit of research beforehand (there are many different sites that weigh the pros and cons of each).  I would like to remain impartial in this blog, as my writing is solely for educational purposes.  Speak with a professional in the mortgage industry and/or a professional in the insurance industry to explore your options.  However, keep in mind that professionals in the mortgage industry will benefit from selling you Mortgage Life Insurance and professionals from the insurance industry will benefit from selling you Life Insurance.

INSURANCE “Half-way there” Recap

Are you still with me?  I know…all this talk about insurance is extremely confusing and there are so many different types!  If you’re still confused, rest assured – you’re not alone.  I will do a full recap of all the types of insurance we’ve discussed in an upcoming post.  In the meantime, please try to keep going and please feel free to post any questions under the comments section!  We’re almost done with INSURANCE.  Here is a quick review of the different types of Insurance that we have learned about so far:

MORTGAGE DEFAULT INSURANCE

·         Mandatory for High-Ratio Mortgages

·         Protects the lender if you ever miss payments

·         Cost is added to your mortgage loan amount and, thus, into your mortgage payments

·         CMHC, Genworth, and Canada Guaranty

TITLE INSURANCE

·         Nowadays, often Mandatory for all types of mortgages (depending on the lender)

·         Protects the lender (and you, a bit) from any defects in title

·         Cost is paid for by you at the lawyer/notary public’s office on completion of your house purchase

HOME INSURANCE

·         Fire Insurance is Mandatory for all mortgages

·         Protects the lender and you if anything ever happens to your house (i.e. It goes up in flames)

·         Cost is paid for by you and can be paid monthly

CONTENTS INSURANCE

·         NOT mandatory but is highly recommended

·         Protects you if anything ever happens to the contents of your house

·         Cost is paid for by you and can be paid monthly with the rest of your Home Insurance payment

Home Insurance and Contents Insurance

So far, you have learned about two different types of insurance: Mortgage Default Insurance and Title Insurance.  Aside from Mortgage Default Insurance and Title Insurance, there are also other types of insurance that are available for home-owners to protect you if something should ever happen to you or your house.  DO NOT get these types of insurance confused with Mortgage Default Insurance.

To ensure that you understand the different types of insurance and do not get them all confused, I am going to briefly explain the other four main types that you will likely encounter during your home-buying process:

·         HOME INSURANCE and CONTENTS INSURANCE

·         MORTGAGE LIFE INSURANCE (or Mortgage Protection Insurance) and LIFE INSURANCE

I will explain MORTGAGE LIFE INSURANCE and LIFE INSURANCE in my next blog entry.

HOME INSURANCE, sometimes called Homeowners Insurance, insures you and the lender if something ever happens to your property.  Home Insurance is a requirement of the bank when you get a mortgage.  There are many different facets to Home Insurance and you can pick and choose what kind of coverage you would like to get for the house.  However, you must obtain fire insurance payable to your lender for all mortgages (for the full replacement cost).  The reason for this requirement is because the bank wants to know that if your house goes up in flames, the property will still be covered and they will be able to recover the money they have lent to you.  Home Insurance can be obtained from a number of companies across Canada, including BCAA (in BC) and Canadian Direct Insurance.  Home Insurance is paid for by you and is usually paid on a monthly  basis.

CONTENTS INSURANCE can be added to a standard Home Insurance plan and I highly recommend this to all home-owners.  However, this is just a recommendation and Contents Insurance is not mandatory.  Getting insurance coverage for your contents (anything that is not attached to the house, such as televisions, computers, jewellery, etc) will provide you with peace-of-mind in case anything ever happens to your house.

Remember:  Home/Fire Insurance is mandatory when obtaining a mortgage and Contents Insurance is recommended.  The above information is a very general overview of Home Insurance and Contents Insurance and you should contact a Home Insurance provider for more detailed information on your options and for rates.

What is Title Insurance?

Nowadays, TITLE INSURANCE is required by many lenders when you obtain a mortgage.  When you buy a house, your ownership is registered in the Land Title Office and your name is put onto the property’s Certificate of Title.  The lender’s name is also put on title as a mortgage holder. 

Title Insurance protects the lender and you against any losses that may occur relating to your property’s title (ie. Your ownership of the property).  Title Insurance is paid for upon the completion of your purchase (at your lawyer’s or notary public’s office) and generally costs around $200-$300. 

To make things simple, here’s a quick list of what Title Insurance may cover:

·         Title defects (ie. Any issues with title that keep you from having clear ownership of the property, such as liens, charges, etc.)

·         Title fraud, forgery, or duress

·         Errors in survey certificates

·         Any other title-related issues that may hinder your ability to sell, mortgage, or lease your property in the future

Again, not all lenders require Title Insurance but it is good to know that you may be required to pay for it when you buy a house.

The Three Mortgage Default Insurers

In Canada, there are 3 entities that offer Mortgage Default Insurance:

1.      Canada Mortgage and Housing Corporation (CMHC)

2.      Genworth Financial

3.      Canada Guaranty (formerly AIG)

The cost for all of them is the same.  However, they all have slightly different guidelines, depending on what kind of high-ratio mortgage you are obtaining (a few examples: primary residence, rental, refinance, business for self, new immigrant, etc.).  This brings me to an important note:  When you apply for a High-Ratio Mortgage, you must first meet the guidelines set out by the Mortgage Default Insurers.  Only after you have been approved for Mortgage Default Insurance can you move onto the next step, which is to meet the guidelines of the bank.  Banks generally follow the guidelines set out by the Mortgage Default Insurers, although they all offer different mortgage products.  Thus, if you are applying for a High-Ratio Mortgage, the most important thing is for you to do is to qualify for Mortgage Default Insurance.

Guidelines for Mortgage Default Insurance include things such as the maximum amount of money you are able to borrow (determined through what is called a Loan to Value Ratio), the minimum down-payment required, minimum credit scores, and the maximum amount of other debts permitted.

Typically, you do not have to choose which Mortgage Default Insurer to use – your mortgage broker and bank will usually do this for you.  This is because many mortgage brokers, banks and/or underwriters have their own preference of which Mortgage Default Insurer they like to work with, usually due to existing relationships and/or similar rules.