1. What is a Mortgage?
2. Mortgage Basics
3. Get a Mortgage Pre-Approval
4. Variable Interest Rate Mortgage
5. Variable Interest Rate Mortgage (Open)
6. Home Equity Line of Credit.
7. Assumable Mortgage
8. Fixed Rate Mortgage
9. Interest Only Mortgage
10. Low Interest Rate Mortgage
11. Mortgage Glossery
1. What is a Mortgage"?:-
A mortgage is a loan secured by a lien on your home. The amount of your mortgage is typically the purchase price of the home; minus your down payment. There are several different types of mortgages such as:
- Variable Rate Mortgages (VRM)
- Variable Rate Mortgage (Open)
- Variable Rate Mortgage (Close)
- Fixed-Rate mortgages (FRM)
- Home Equity Line of Credit (HELOC)
- Balloon mortgages (Less Common)
- Bridge mortgage (also known as bridge financing)
- Construction mortgages
When searching for a mortgage, it's important to understand the details of the payment terms. You will want to consider the interest rate, the length of the loan, the initial fees and points on the loan, and how property insurance and real-estate taxes are paid. Mortgages are competitive, so shop around online to find the best rate.
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2. Mortgage Basics What the heck does "mortgage" mean anyway? Strangely enough, the word "mortgage" comes from the French word "mort," which means "dead," and "gage," from Old English which means "pledge". According to Sir Edward Coke (who lived from 1552 to 1634), the term came from the doubtfulness of whether or not the mortgagor would pay the debt! In those days, if the mortgagor did not, then the land pledged as security for the debt was taken away. The land was considered 'dead' to the mortgagor. (In other words, as if the person never had it.)Nowadays, the term mortgage is commonly used to refer to a loan for the purpose of purchasing a property. We don't associate anyone's death with it! (Although, it might seem as if you might be dead before your mortgage is paid off.). Home mortgages are the most common type of mortgage. Very few of us will be in the unique position of paying cash for our home.Unlike most loans, your home mortgage will be renegotiated before you've paid it off. This is standard. In fact, you will have a 'life' of the home mortgage and a 'term' for the interest rate that you pay. The life of the home mortgage is commonly 20, 25, 30 or 35 years (Also known as amortization). This represents the length of time in which your home will be paid off (if you pay regularly and with the specified amount).You will also have a term for the interest rate that you pay on your home mortgage. This is the length of time over which you will have an agreed payment schedule with certain additional conditions. In effect, this is the time period over which you've agreed to:
- Pay at a particular rate of home mortgage interest (either locked in or floating)
- Certain restrictions for additional payments (usually a certain percentage of the original home mortgage which you can put down each year)
- Certain restrictions for the increase of monthly home mortgage payments (usually a percentage of the specified monthly payment)
- Certain restrictions on your ability to re-negotiate the home mortgage interest rate (which is determined by whether the mortgage is "open" or "closed")
- Penalties if you want to renegotiate the terms of the home mortgage before the specified time period of the contract is expired.
This contractual agreement is normally from 6 months to 10 years. Note that many financial institutions will only negotiate terms for a home mortgage for 5 years or less.
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3. Get a Mortgage Pre-Approval Once you've made the necessary calculations and feel that you are ready to obtain a mortgage, it's a good idea to select a lender to get pre-approved. This means that the lender will look at your finances to establish the amount of mortgage you can afford. At that time, the lender will give you a written confirmation or certificate for a fixed interest rate good for a specific period of time. Some buyers may not wish to pursue a mortgage pre-approval until they have found the home they want to buy. However, the idea of having a pre-approved mortgage amount makes the search for your new home much easier and less time-consuming because you have a good price range in mind. Some of the things you will need to have with you the first time you meet with a lender are:
- Your personal information, including identification such as your driver's license
- Details on your job, including confirmation of salary in the form of a letter from your employer
- Your sources of income
- Information and details on all bank accounts, loans and other debts
- Proof of financial assets
- Source and amount of down payment and deposit
- Proof of source of funds for the closing costs (these are usually between 1.5% and 4% of the purchase price)
- Social Insurance Number (SIN)
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4. Variable Interest Rate Mortgage
- Variable Interest Rate Mortgages historically have had lower interest rates than long term fixed mortgages
- Home buyers who choose a Variable Interest Rate Mortgage are usually willing to accept a little risk as they believe this will lower their overall cost of borrowing
- When rates change, your payment amount remains the same. However, the amount that is applied toward interest and principal will change. If interest rates drop, more of your mortgage payment is applied to the principal balance owing, which can help you pay off your mortgage faster
- Lock in your interest rate by converting to a Fixed Rate Mortgage at any time. The term must be longer than the number of years remaining on the Variable Interest Rate Mortgage's term
- The Closed Variable Interest Rate Mortgage has flexible prepayment options that allow you to prepay your mortgage up to 15% of original principal amount per year and increase your payments by up to 100%, per term, which can help you reduce your interest costs and pay your mortgage off faster
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5. Variable Interest Rate Mortgage (Open) With this type of mortgage during the term of the mortgage; you can get the following:-
6. Home Equity Line of Credit.A special kind of loan (also known as a "revolving loan") which is secured against a property and allows the owner to borrow and repay money at his/her leisure. Periodic payments of at least accumulated interest are required but the loan is fully open: may be paid out in whole or in part at any time and, if there is still money available under the loan ceiling, the borrower may take more money for his/her use. Home Equity Line of Credit is abbreviated as HELOC. This refers to a loan in which the lender agrees to lend a maximum amount within an agreed period. This differs from standard loans or a reverse mortgage because the borrower is not advanced the entire sum up front, but uses the line of credit to borrow sums totaling no more than the amount.A Home Equity Line of Credit in many ways is similar to a credit card. At closing you are assigned a specified credit limit that you may borrow up to (this is not a check). A draw period usually lasts anywhere from 5 to 25 years and allows you to borrow HELOC funds whenever you feel the need; you're only required to pay back the amount you use plus interest. What's nice about the home equity line of credit is that often, you are only required to pay the interest until the end of the draw period.
- Great rates
- Fixed payments
- A bility to pay off your mortgage faster at any time
- Increase your payments to any amount any time
- Security of being able to lock in to a fixed rate at any time
- You can also pay off all or part of your mortgage without paying compensation (an administration fee applies ). That means lump sum payments of any amount can be made at any time.
- The interest rate is set on the first day of each month, but your payments remain constant.
- When interest rates fall, more of your set monthly payment goes toward paying off your mortgage principal and less toward interest. That means that your mortgage gets paid off faster.
- As with most variable interest rate mortgages, you also have the option of locking in your interest rate by converting to a Fixed Rate Mortgage at any time.
- A Home Equity Line of Credit offers you a flexible alternative to a traditional mortgage
- Save on interest by combining all of your borrowing into a Home Equity Line of Credit
- A revolving credit product with a variable interest rate as low as Prime
- Lets you determine your own monthly payments - as low as interest only, or as much as you want
- Gives you flexibility to lock into a fixed term interest rate at any time and as your fixed rate balance decreases your available credit increases
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7. Assumable Mortgage You've put in an offer on a house. The real estate agent says that the seller of the property has a mortgage on the property that is 'assumable' and it's at a great interest rate. What do you do?
Assumable mortgages are mortgages that can be passed from one owner to another. It can be an advantage to assume a mortgage if the interest rate is very good compared to negotiating a brand new mortgage. Keep in mind that you cannot assume a mortgage unless you have a big enough down payment to cover the difference between the value of the house and the amount of the mortgage. Otherwise, you are in the situation of negotiating a second mortgage - which you should generally avoid. Second mortgages are often at much higher interest rates and any savings you get from assuming the first mortgage could be lost. Also remember that when you assume a mortgage you assume it 'as is'. This means that it may not have the options you want, like prepayment privileges and payment frequency options. Read the fine print on any mortgage contract - but especially if you want to assume a mortgage. Be sure it's the best deal for you.
8. Fixed Rate Mortgage A large majority of people choose the fixed rate mortgage. This mortgage guarantees a certain interest rate for a period of time. The most popular fixed mortgages are 3,4 and 5 years. However, you can have a fixed mortgage for as short as 6 months or as long as 10 years.
The biggest selling feature of fixed mortgages is the 'guarantee' of the payment that you will be paying. However, if you pick a long-term fixed mortgage - say 5 years - you'll pay a lot for the privilege of having your interest rate locked in. In general, unless interest rates are steadily climbing you'll pay more in interest costs over the life of your mortgage if you choose long term fixed each time. Why? You'll actually pay a much higher interest rate over a longer period unless interest rates go up fairly significantly. However, there are some caveats:
- This strategy works best when interest rates are staying fairly stable (within 1 percentage point or so) or are falling.
- You should have a mortgage lender who will allow you to lock in to a longer-term mortgage if rates go up and without a penalty.
If you have these two features through your lender go ahead and get a short-term fixed mortgage. The only downside is signing papers for your next term on a more frequent basis. When looking at fixed rate mortgages don't be fooled by fancy promotions like cash back and other things. These incentives are usually restricted to 5 year and longer fixed rate mortgages. The lender can afford to give them because you are going to be their customer for a long time. Further, they don't reduce your interest rate which is the one thing that will really benefit you. Your other best bet in an interest market where rates are staying the same or dropping is usually some form of 'variable' or 'adjustable' mortgage. These mortgages will allow you to get a better rate now in general (while the amount of your mortgage is higher) and will allow you to take advantage of fluctuating rates (which are hopefully moving in your favor). Again, you must have the option to lock in if rates go up. This will allow you to manage your risk. Simply keep a sharp eye on interest rates. Pay attention to what the analysts are saying about the short and longer-term future of rates. Then lock into a fixed rate mortgage from your variable or adjustable one. This gives you the best of all possible worlds, including the lowest interest rate now and options later. But you have to make sure that you HAVE this option. Read the fine print. And be sure to ask your lender if it is possible before you sign the fixed rate mortgage papers.
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9. Interest Only Mortgage An "interest-only" mortgage is like a line of credit. You can pay only the interest on the mortgage. This can greatly reduce your payments in time of financial stress. However, it also means that the debt will never be paid off. With an interest only mortgage, you pay only interest for the first five, 10, even 15 years of the loan. This can lower your monthly payment by quite a lot. And that seems to have increased the popularity of interest only mortgages in the past few years. The interest only mortgage is an interesting mortgage type. All you pay over the life of the mortgage is the interest on the balance. However, there are options once this interest only period ends. You either begin to pay interest and principal at a faster rate than if you’d done that from the beginning, or you can choose the balloon mortgage approach, which means the total loan principal becomes due at the end of your term. When do interest only mortgages become more popular? Typically, as interest rates rise and the cost of housing increases, more people will look at this type of mortgage. Why? At issue for some consumers is the size of their mortgage payment and making that payment lower. At the same interest rate, an interest only payment is less than a payment of both interest and principal. A lower payment can mean that you will have a higher budget for home shopping. And that makes a big difference for some home buyers. Many interest only mortgages have an interest only period (5 to 15 years) and then you begin to pay both interest and principal. If your interest only mortgage has a term of 30 years, after your initial interest free term, you would begin to pay interest and principal. You would begin to pay principal as well as interest in order to pay-off the balance by the end of 30 years. This actually means that your payments will be considerably higher than they would have been if you’d paid off principal all along.
Other interest only mortgages are like balloon mortgages. However, most balloon mortgages would ensure that you are paying down the original principal over time. When you pay your final balloon payment, it would be less than the original loan amount because of your payments of both interest and principal. With an interest only balloon mortgage, your final payment should be exactly equal to your original loan amount. All you’ve paid is interest; all the principal of the loan remains. When would you consider this kind of loan? The circumstances to consider this kind of loan would be unique. Usually, a family with a single wage earner should not be considering this type of mortgage. Your exposure to financial risk would be too high. However, investors might be interested. The advantage with an investment property, that you expect to go up in value, is that the interest you pay is tax deductible. Therefore, you can deduct the interest paid from your taxes, while you own the property. At the end of the period of the loan, you could then sell your property (hopefully at a profit) and take the returns to pay out the mortgage. However, this is a gamble. There’s no guarantee that the property appreciates in value. And there’s no guarantee that you can sell it when you decide to. If you can’t sell the property, you would have to refinance (unless you have made enough from the property to pay out the balance of your mortgage) and refinancing could cause you some challenges. The other advantage to this kind of mortgage is that you can save or invest the money that you would have paid in principal on the loan. Again, this situation will usually favor investors of one kind or another. Interest-only loans come with many of the options of other types of mortgages. With some, you can lock in a fixed interest rate for the full term, while others resemble adjustable rate mortgages (ARM), which carry a fixed rate for a certain number of years and then adjust every six months to a year. What kind of savings are you looking at on your monthly mortgage payment? They can be significant. Let’s look at an example: You borrow $200,000 using an interest only loan with a 4.75 percent rate and no principal payments due for five years. Your monthly payment will be just $791, or about $250 a month less than if you went with a regular 5-year ARM with the same interest rate. This can really work for you, if your property appreciates in value. Of course, there's never a guarantee that prices will go up. And if you don’t sell your property as planned, your monthly payment jumps drastically after your interest only period. You’ll have to be prepared for that. Interest-only loans can also make sense for people whose income is sporadic, either because they are paid on commission or because they receive a significant portion of their income in annual bonuses. In this case, you have the option of only paying interest some months, but can pay above and beyond the amount due when they get their bonus checks. There is typically no prepayment penalty on interest only loans. This gives you flexibility in applying extra money to your mortgage when you have it, and yet keep monthly payments low.
10. Low Interest Rate Mortgage A low interest rate mortgage is the fondest desire of every potential homebuyer.
How do you get a low interest rate mortgage? Well, while you can try to negotiate yourself with a commercial lender, you might also want to think about a mortgage broker or contact me. A mortgage broker will do some of the footwork on your behalf. A mortgage broker may know about smaller lending institutions which are offering a much more competitive interest rate than a big bank or finance company. However, mortgage brokers will not necessarily work with all potential lenders. They are also not completely unbiased because they may prefer certain lenders who provide them with the best commission. So, you will always have to do some checking of your own. Having said that, a mortgage broker may find some great opportunities for you to get the lowest possible interest rate. Once a mortgage broker identifies some good low interest rate mortgage opportunities it's up to you to be sure that the mortgage, and its options, match your needs. Also, don't just take the broker's word for it that a company is a good one…check! You have to remember that the mortgage broker will be getting a commission if you take your mortgage with the company they recommend. Since they get a commission they are not completely 'unbiased'. For instance, they could recommend a company which gives them a better commission level. So, check before you say yes. In the end, even if you use a broker, do some research yourself. You'll be more confident when you do sign on the dotted line. More importantly, you might even find a better low interest rate mortgage deal than the one you're being offered.
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11. Mortgage Glossery
- Amortization : The actual number of years it will take to repay a mortgage in full. This period can be longer than the loan's term. For example, a mortgage may have a 5-year term and a 25-year amortization period.
- Appraised value : An estimate of the market value of the home and property that the borrower pledges as security for the mortgage. This value may be more or less than the purchase price of the property.
- Assets : The things of value that you own, such as your home, car, investments or summer home.
- Blended rate mortgage : A mortgage that combines the amount the borrower owes under an existing mortgage with additional mortgage money required by the borrower. The interest rate for the new amount borrowed is a "blend" - or combination - of the interest rate of the old mortgage and the interest rate for the additional amount to be borrowed.
- Blended mortgage payment : A regular installment payment composed of both principal and interest in which part of the money received is applied toward the principal of the loan and part is applied to pay the interest. This is the norm for mortgage payments.
- Bridge financing : A loan made for a short term, to "bridge" (or cover) the time gap between completing the purchase of one property and finalizing arrangements to pay for it. The need for this type of financing often results from mismatched closing dates.
- CMHC/Canada Mortgage and Housing Corporation : The Canada Mortgage and Housing Corporation is a federal Crown corporation that administers the National Housing Act. CMHC's services include providing housing information and assistance to consumers and providing mortgage default insurance for high ratio mortgages.
- Carrying costs : The expenses of living in and maintaining a home and property. This includes mortgage payments, property taxes, heating, repairs, maintenance fees, etc.
- Closing Costs : Costs, in addition to the purchase price of the home, such as legal fees, transfer fees and disbursements, that are payable on the closing date. Closing costs typically range from 1.5% - 4% of a home's selling price.
- Closed mortgage : A mortgage that generally cannot be prepaid or renewed early unless the borrower is willing to pay additional interest. Some lenders may allow limited prepayment privileges without additional interest.
- Closing date : The date the purchase of the property becomes final and the new owner takes possession.
- Collateral mortgage : A loan evidenced by a promissory note and backed by the collateral security of a mortgage on a property. The money borrowed is generally used for a purpose other than the purchase of a home, such as a vacation or home renovations.
- Conventional mortgage : A first mortgage of up to 80% of the property's appraised value or purchase price, whichever is less subject to lending license.
- Convertible mortgage : A mortgage that may be changed to another term at any time.
- Deed : A legal document that transfers and evidences ownership of the property to the buyer.
- Default : Failure to repay an outstanding debt as agreed.
- Deposit : A sum of cash that must be paid to the vendor by the purchaser. This money is a symbol of the purchaser's commitment to buy. If the offer is accepted, the deposit is applied to the down payment. If the buyer turns down the offer later, the deposit may or may not be returned.
- Down payment : The amount of money put forward by the buyer toward the purchase price of a home.
- Equity : The difference between the price for which a property could be sold and the total amount owing on it.
- First mortgage : A mortgage that is registered first against the property. This mortgage has to be paid first in the event of sale or default.
- Fixed rate mortgage : A mortgage for which the rate of interest is fixed for the term, i.e., a set period of time.
- Floating or Variable rate mortgage : Another name for variable rate mortgage.
- Gross debt service ratio : The percentage of a borrower's gross monthly income that can be used to pay housing costs, including the monthly mortgage payment (principal and interest), heating costs, property taxes and condominium fees (if applicable). The total should not be more than 32% of monthly gross income.
- High ratio mortgage : A mortgage for more than 80% of either or both a property's appraised value and its purchase price. In other words, the down payment amount is less than 25% of the purchase price/appraised value.
- Interest : Interest is the cost of borrowing and is the amount paid on the money borrowed. It is represented as an annual percentage rate applicable to the mortgage.
- Liabilities : What you owe, including taxes, mortgage, car loan and credit card balances.
- Maturity date : The last day of the term of your mortgage agreement. The mortgage must be paid in full or renewed by this date.
- Maximum rate : An alternative term for protected rate.
- Mortgage : A mortgage is both a loan used to purchase or refinance a home and a security for the repayment of the loan.
- Mortgage disability insurance : Insurance that pays your mortgage payments should you become ill or disabled and unable to work.
- Mortgage default insurance : Government-backed or privately backed insurance protecting the lender against the borrower's default on a high-ratio mortgage.
- Mortgage life insurance : Insurance that pays off your mortgage debt in the event of your death.
- Mortgage payment : The regular installments made towards paying back the principal and paying interest on a mortgage.
- Mortgagee : The lender.
- Mortgagor : The borrower.
- Multiple Listing Service (MLS) : A computer-based system for relaying information to real-estate agents about properties for sale.
- Open mortgage : A mortgage that can be prepaid or re-negotiated at any time without additional interest.
- Open variable mortgage : A variable rate mortgage in which the interest rate varies with money market conditions. You may prepay or renegotiate an Open Variable mortgage at any time without additional interest.
- Pre-approved mortgage : A mortgage for a set maximum amount and interest rate that is arranged prior to the purchaser finding a house. Often arranged prior to shopping for a home, this option can help the purchaser establish an affordable price range. Also known as a pre-arranged mortgage.
- Prepayment : Allows the borrower to prepay a portion or all of the principal mortgage balance, with or without penalty, ahead of schedule. This decreases the total amount of interest paid over the life of your mortgage. This option is typically restricted to specific amounts and times.
- Principal : The amount initially borrowed under the mortgage.
- Rate (interest) : The annual percentage amount charged in return for borrowing funds.
- Realtor : A real estate professional who is a member of a local real estate board and the Canadian Real Estate Association.
- Second mortgage : A mortgage granted when there is already a mortgage registered against a property. If the borrower defaults and the property is sold, the second mortgage is paid after the first.
- Security : Property, or assets, offered as backing for a loan. In the case of mortgages, the property being purchased or refinanced forms the security for the loan.
- Survey : A document providing details of a property's boundaries, measurements and structures. It also describes any easements, rights-of-way or encroachments made by either your property or by adjoining properties onto your property.
- Term : The length of time a lender will lend mortgage funds to a borrower. Most mortgage terms run from six months to five years. Certain lenders may offer longer terms, e.g., 6 or 7 years. After this period, the borrower can either repay the balance - the remaining principal plus interest - of the mortgage, or renew the mortgage for another term. The total length of a mortgage is usually made up of several terms.
- Title : The legal evidence of ownership to a property.
- Title search : A detailed examination of the registered title documents to ensure there are no liens or other encumbrances, or claims, on the property, and no question regarding the seller's statement of ownership.
- Total debt service (TDS) ratio : The percentage of a borrower's gross (before tax) monthly income needed to cover payments for housing costs, including principal, interest, taxes, heating costs and condominium fees (if applicable), and all other debts and obligations, such as loans and credit cards. The total should not be more than 40% of gross monthly income.
- 20% Prepayment Privileges : You may prepay your mortgage up to 20% each calendar year. This can be done through principal and interest payments and/or lump sum payments provided that the prepayment does not exceed a total of 20% of the original principal balance each calendar year. Prepayment of 20% is available on terms up to 5 years. On a 7 year term the prepayment is 15%.
- Variable rate mortgage : A mortgage for which the rate of interest fluctuates as money market rates change. The payment will usually remain the same for the term. If rates increase to a point where the payment does not cover the interest, an increased payment or a pay down of the principal would be required. Also known as a floating rate mortgage.
- Vendor : The seller in a real estate transaction.
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Details provided here are for information purposes only. Refer to the terms of your title insurance policy for the details of coverage and exclusions. Refer to your title insurance policy for full details on what legal expenses are covered. Should you have a question, please do not hesitate to contact me.