What is a Mortgage?
RAFE: Great, so, now, Bobby, this is probably a very obvious question and I’m sure a lot of people will know the answer already but what exactly is a mortgage?
BOBBY: Oh, a mortgage is a security that’s taken against real property, so, that’s basically the definition of a mortgage. Generally it involves the providing of funds to the borrower. The borrower utilizes those funds to purchase the property and the mortgage is the security against the property. So if the bank is not paid for each dated monthly payment with respect to mortgage payment’s the bank can take proceedings to possess the property and sell the home.
RAFE: What is someone and I know I’m, probably, putting you on the spot but what if someone, you know, what should they know or be aware of when they’re looking to get a mortgage?
BOBBY: There’s a number of terms in the mortgage that you need to be aware of. The key things that jump out to most people are or is the interest rate but I would, in fact, state that that’s probably not one of the most important things. I’d say more important than that is the term of the mortgage, whether it’s an open mortgage or a closed mortgage. An open mortgage means you can pay it out at any time. A closed mortgage means that you can pay this out but there’ll be a penalty often three month interest payment or it could be even more than that depending on your mortgage should you wish to pay out the mortgage before its maturity date. The maturity date’s the date of the term of the mortgage. There’s, also, something called a fixed rate and a variable rate. A fixed rate is a, means the mortgage has the exact same interest rate for the life of the mortgage. For a variable rate the mortgage rate changes depending on what the banks primary is at the time.
RAFE: Interesting, so, there’s a number of things to look at. You talked about the maturity rate and the difference between a fixed rate and a variable rate. And, so, do you have a recommendation or, I guess, that depends on the client, but how do you feel about fixed rates and variable rates?
BOBBY: Well, I, the way you phrased it there is correct. It really depends on the offset of the client, so, there’s pros and cons to both. Fixed rate you have certainty with respect to what your interest rate is going to be for the entire term and you’ll know at maturity exactly the amount that you’ll have outstanding on your mortgage. A variable rate would be better for someone who’s a little bit more prone to risk. You’ll often get a better interest rate on a variable rate so it would be a lower rate at the time and, so, it really just depends on the offset of risk the client has and what they’re looking to get out of the mortgage.
RAFE: And, I guess, so, I’m certainly not an expert on mortgages but, you know, that, obviously, in the collapse, the collapse a lot of people who lost their homes was it because, partially, because they had a variable rate?
BOBBY: There’s a couple reasons why that happened. I’d say the two main ones are that the banks were lending to individuals over and above the, actual, value of the homes and secondly the banks were lending to individuals at rates that were, actually below, they call sub-prime mortgages. So they’re below the prime rate often at 0% for the first year or two years but, eventually, they were to increase. So people were paying very little in the early goings but once the prime rate rose and the interest rate on their mortgage rose they could not no longer afford those mortgage payments and they defaulted collectively. A lot of people defaulted causing a crash in the market due to high default rates and the banks having to foreclose or power sell on many properties.
RAFE: And, so, what is some of the main mistakes people make when getting a mortgage if any?
BOBBY: I think the big mistake people make is not consulting with the proper professionals. I think it’s important before signing a mortgage document that you meet with, at least, a number of mortgage professionals. I would suggest reputable mortgage agents. I think some people just go to their bank, which they’ve done all their personal banking with and these banks, often, they’re great for personal banking but on the mortgage side just because a bank is good for your day to day transactions and your personal credit card doesn’t mean they’re going to give you the best mortgage. So speaking to a mortgage professional, someone who can speak to you a lot about the different lenders that are out there and can match your, I mean, depending on who you are, you might be a business person, you might be an employee, you could have assets outside the country, you could be [inaudible 0:06:19.2] Depending on the circumstances there’s different lenders that specialize in certain areas so it’s important that you speak to a mortgage professional and, as well, consult with a lawyer prior to signing the mortgage commitment document.
RAFE: Now, would a lawyer help you find the right mortgage agents?
BOBBY: For sure, I think, a good real estate lawyer would help point you in the right direction, at least, a type of mortgage agent you should be speaking to, again, lawyers are not financing professionals. They’re professionals in terms of the mortgage contracts so they won’t know say who’s going to give you the best rate and which is the bank to go with but they can definitely mostly point you in the right direction there and then could review the legal terms with respect to that mortgage that the mortgage professional ends up offering to the individual buyer.