Frank Underwood, the ruthless politician played by Kevin Spacey in the hit Netflix series House of Cards, is a rather quotable guy. Not a very nice guy, mind you, but quotable nonetheless. Among Frank’s many axioms is this gem: “Pay attention to the fine print. It’s far more important than the selling price.” The fictitious (thankfully) Washington Democrat was gloating about how he had deviously maneuvered a bill through the U.S. Senate, but Underwood could have just as easily been talking about the process of buying a home and getting a mortgage.
Sure, the selling price of a house is pretty important but there are a number of equally important details that are often overlooked. If you’re buying a home, think like Frank and look beyond the selling price. Here are five factors to consider.
Is this your forever home?
There are a lot of out-of-pocket expenses that come with buying and selling a house: home inspections, legal fees, moving services, land transfer taxes and assorted closing costs (like beer and pizza on moving day). Move too often or too soon after buying and it can potentially wipe out the financial gain you’ve made. Don’t forget about the GST/HST on new homes either. Rule of thumb: Don’t buy unless you’re confident you won’t have to move for at least five years, preferably more. That way, you’ve got time to build equity in your home.
Have you talked amortization?
Your mortgage is amortized—that is, spread out over the total number of years you will be paying it. If your down payment is 20% or more, it’s considered a conventional mortgage and can be amortized over a maximum of 30 years. High-ratio mortgages (which require mortgage default insurance because the down payment is less than 20%) can be amortized for up to 25 years. Bear in mind, the longer your amortization period, the more interest you ultimately pay. Rule of thumb: Keep your amortization as short as possible.
What about mortgage term?
Your mortgage term is the length of time you’re committed to a mortgage rate. It can range from six months to 10 years, but a lot of people choose five-year terms because they can “set it and forget it,” for a while at least. I get that. But a better strategy would be to choose shorter terms and knock a year off the amortization period every time you renew. Yes, your payments will increase, but not too significantly. And if you do this you could knock five years or more off the total length of your mortgage—and save thousands of dollars. Rule of thumb: Give yourself more opportunities to reduce the length of your mortgage.
Your rate matters
A lot. Most home buyers understand the interest rate on their mortgage is an important number and can make a difference of thousands, even tens of thousands of dollars. Case in point: A mortgage of $525,000 amortized over 25 years at 4.75% would rack up $367,709 in total interest. The same mortgage at 5.75% would cost $458,019 in interest. That’s $90,310 more. Rule of thumb: Even with rates at or near historic lows, financial institutions compete fiercely for your business. Don’t be afraid to ask for a little more than their “best” offer.
Pay early, pay often
Your mortgage lender has a number of payment options, ranging from monthly to accelerated weekly. The more frequently you pay, the more money you’ll save. By setting up accelerated payments, you’ll actually pay the equivalent of an additional payment, by the end of the year. (It’s simple math: 52 divided by four equals 13 months of payments.) Do that over the duration of your mortgage and you’ll save thousands of dollars. Rule of thumb: Automate your mortgage payments to coincide with your paycheque to ensure you never miss a payment.
So you see, the purchase price of your home is important but the details of the transaction are just as crucial. By employing these strategies, you can chip away at your mortgage faster and save some serious coin. After all, as now President Frank Underwood also likes to say, “That’s how you devour a whale . . . one bite at a time.”
Bangs ring on desk.
Robert R. Brown is a personal finance speaker and the author of Wealthing Like Rabbits. Follow him on Twitter @wealthingrabbit
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