What is a Mortgage
A mortgage is made up of two parts: principal and interest. Principal is the actual amount borrowed. Interest is the lender's fee you are charged for borrowing.
You'll have to decide on an amortization period (the length of time it will take to completely pay off the mortgage) and the term, or length of time each mortgage agreement guarantees the interest rate.
Before you go to a financial institution or mortgage broker, keep in mind that there are many mortgage options available. Shop around for the best rates and the best terms. Negotiate. Everyone wants your business, but it's up to you to look after your interests. Of course, the key thing to remember is to negotiate a mortgage that fits into your lifestyle, and doesn't take over your life! Your mortgage broker can help guide you through this process and supply you with information.
Amount of the Mortgage
With lower interest rates, you may qualify for a larger mortgage because
your monthly payments will be lower. But always keep in mind that the
larger your mortgage, the more interest you'll pay in the long run.
That simply means your house will cost more. Also, what if interest
rates rise? Will you still be able to carry the payments comfortably?
To qualify for a conventional mortgage, you simply have to have a 25% down payment of the purchase price, with the mortgage not exceeding 75% of the appraised value.
If your down payment is less than 25%, then you qualify for a high-ratio
mortgage. This type of mortgage requires loan insurance, which can cost
an additional 0.5% to 3.75% of the mortgage amount. With this type of
mortgage you could also be limited to a maximum house price.
Of course, if you cannot add on to your mortgage, you may consider
a second mortgage. Each mortgage uses your home as security and gives
the mortgagee the right to take your home if you default on your loan.
The first mortgagee gets paid first in cases of default and has the
best chance of recovering all of its money. So it only goes to figure
that subsequent mortgages usually come with a higher interest rate.
Here are some mortgage options you should know about:
Every lending institution is different, and each will have their own customizable mortgage options. When you're hunting for a lender and a home, see how the following features could be beneficial to you.
This is a wonderful option if you receive regular bonuses or if your income fluctuates throughout the year. With a pre-payment privilege, you have the right to make payments toward the principal portion of your mortgage over and above the monthly payments. A mortgage with a pre-payment option is closed. An open mortgage means you can pay the entire principal sum without notice of bonus.
If you still have time remaining on that fantastic loan you negotiated, portability is one option you'll want to discuss with your lender. Quite simply, it means transferring the balance of your current mortgage at the existing rates and with the existing terms and conditions, to your new home.
Let's say that the vendor has negotiated a dynamite mortgage. With an assumable mortgage you, the purchaser, simply assume the obligations of the mortgage. This is a wonderful feature especially if the terms are more favourable than the existing market conditions would allow. Remember, when it is time for you to sell, you may still be liable for any mortgage you allow the buyer to assume. This means if the buyer stops making payments, you could be accountable for the payments. Be sure to have the subsequent buyer approved for the assumption of the payments, thereby avoiding this potential land mine.
If you need additional funds down the road, will your mortgage terms allow you to increase the principal amount? Usually, your new rate will be a blended amount of the initial mortgage rate and the prevailing rates. It's a great option to discuss with your lender if you foresee large expenses in your future like renovation or education costs.
Know what all the
terms in a mortgage mean... click here for details...