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Things You Need to Know Before Getting a Mortgage
When purchasing a real estate property, unless paying cash, consumers typically finance all or a portion of the purchase price. This means borrowing money from a financial institution to buy a home, using the intended home of purchase as collateral for the loan.
Mortgage payments include the principal (the amount borrowed), and the interested (the amount charged for borrowing the money). Payments can be made once a month, bi-weekly, or weekly, depending on availability from the lender. A typical mortgage is for an amount that does not go over 75% of the appraised value of the property or the purchase price, whichever is lower. A minimum 25% of the purchase price is required for the down payment. However, with a high-ratio mortgage you may pay less than 25% of the cost of the home as a down payment.
Home mortgages are available from several types of lenders: banks, mortgage companies, trust companies and credit unions. Different mortgage lenders may quote you different prices, so you should contact several lenders to make sure you’re getting the best price. You may also get a home loan through a mortgage broker. Brokers arrange financial transactions rather than lending money directly; in other words, they find a lender for you. A broker’s access to several lenders can mean a wider selection of loan products and terms from which you can choose.
It will normally only take a few days to receive approval for a mortgage, however, it is often recommended to get per-approval for a mortgage. When you put in your offer to purchase, this is almost always on the condition of getting mortgage approval as this assures everyone involved that you are able to pay back the mortgage without defaulting.
Qualifying for a Mortgage
To qualify for a mortgage, the applicant’s gross annual income, credit history, and assets and liabilities (past or present) all impact the final outcome. There are a variety of online mortgage calculators available that can help you to ascertain the amount of mortgage appropriate to your financial situation.
The process involves submitting your financial paperwork to a potential lender and receiving approval for a pre-determined mortgage amount. The pre-approval agreement may also guarantee an interest rate for a mortgage taken out during the 60 to 90 day pre-approval term. The mortgage lender will inquire about such things as your marital status, number of dependent, age, current employment (including how long you have worked there), salary, as well as other sources of income. They will ask for a list of your assets (i.e. vehicles, cash, etc.) and liabilities (i.e. credit card balances, car loans, etc.). Lenders also do a credit check to find out if you pay your bills on time.
Types of Mortgages
Fixed Term Mortgage
For fixed-rate mortgages, the interest rate is established for the term of the mortgage so that the monthly payment of principal and interest is unchanged throughout the term. Irrespective of whether rates move up or down, you understand precisely how much your payments will be thus making personal budgeting easier. When rates are low, it may be better to take a longer-term, fixed-rate mortgage for protection from upward fluctuations in interest rates.
With an open mortgage, you have the ability to repay the mortgage at any time without penalty. The availability options are reduced to shorter terms (6 months or 1 year only), and the interest rate is higher than closed mortgages as much as 1%, or more. This type of mortgage is typically favored by those thinking of selling their home, or if they are going to pay off the entire mortgage (i.e. through the sale of another property, an inheritance, etc.).
Closed mortgages grant the security of fixed payments for terms between 6 months to 10 years. The interest rates are significantly less than open mortgages. They can deliver as much as 20% prepayment of the original principal, which is more than the majority of what people prepay on a yearly basis. However, if you want to pay off the entire mortgage before maturity, there will be a penalty charge for breaking that mortgage. This penalty is customarily three months of interest, or the interest rate differential.
Types of Mortgages (Continue)
The Adjustable Rate Mortgage (A.R.M.)
A mortgage with a lot of flexibility is the Adjustable Rate Mortgage (A.R.M.), particularly chosen when interest rates are going down. The rate is based on prime minus 0.375% and can be changed monthly to reflect the current interest rates. During the first three months of the mortgage, a sizable rebate on the rate is given as a welcoming offer. The mortgage payments usually remain consistent, but the ratio between principal and interest fluctuates. When interest rates go down, you pay less interest and more principal. If rates increase, you pay more interest and less principal. If rates rise substantially, the initial payment may not cover both the interest and principal. Any portion not paid is still owed, or you may be asked to increase your monthly payment. This mortgage is fully adaptable at any time without any penalties to you (providing that you choose a three-year term or greater), and offers a 20% prepayment privilege at any time throughout the year.
Equity mortgages are evaluated based on the equity of the home (market value minus the mortgage amount). You can receive as much as 80% of the purchase price or value of the property. These are generally offered to applicants that do not meet the normal income and/or credit qualifying mortgage guidelines (i.e. little or no income verification, self-employed, and/or less-than-perfect credit).
Multiple Term Mortgages
This type of mortgage provides the convenience of the lower rates of a short term mortgage and the security of a long term, in one mortgage. Your mortgage can be split into as many as five parts, all having different terms, rates, and amortizations, but in one convenient monthly payment. However, you should be aware of any market changes with this mortgage. This type of mortgage is not for everyone, as the amount of time and stress involved is quite high.
The 6 Month Convertible Mortgage
When interest rates go down, or you suspect that they will in the approaching future, a 6-month convertible mortgage gives you a temporary commitment at fixed payments, with the bonus ability that while within the term, the mortgage is fully adaptable to a longer-term from 1 year to 10 years. When the 6 month period is over the mortgage becomes fully open, and it can be renewed with the current lender or moved to another lender. This type of mortgage is offered at most financial institutions, but each lender’s terms are different.
This mortgage takes care of everything automatically for you. For Purchases, it includes Solicitor’s legal fees and standard disbursements to close the purchase and mortgage; Title transfer; Title Insurance from Lan Canada for the clients; CMHC application fee or Appraisal fee; 1% Cash-Back to cover Land Transfer Tax; Registration of Deed and Mortgage. For Refinances, it includes Legal fees and standard disbursements to prepare and close the mortgage; Title Insurance from LandCanada; CMHC application fee or appraisal fee; 1% Cash-Back; Registration of new first mortgage; Registration of discharge of existing first and second mortgage. The minimum available is a 5 years term.
Secured Lines of Credit
This allows you to use the equity in your home to purchase investments (where interest costs would be deductible against the earned income), renovate your home, buy a car, etc., with rates as low as prime. Up to 75% of the purchase price or value of the home can be arranged. It is very easy to access the available credit, with many lenders also providing an issued credit and/or debit card. The money does not have to be drawn until you need it, and you can pay off your balance at any time or make monthly payments. As the balance is paid down, there is much more available credit (revolving credit). As it is a secured product, the conventional legal and appraisal fees are applicable. Now and then, there are promotions where a lender will cover part or all of these costs. You should be cautioned that although these lines are very flexible and versatile it can be extremely tempting to use them for unnecessary purchases.