When purchasing a home, financial assistance is often necessary, typically obtained through a mortgage provided by a bank or another financial institution. A mortgage is a binding agreement where one party (the mortgagor) borrows money from another party (the mortgagee) and agrees to repay it at a specified rate, plus interest, over a set period.
The financial agreement comprises two components: principal and interest. Principal refers to the borrowed amount, while interest is the fee charged by the lender for borrowing. Additionally, the mortgage agreement specifies the amortization period (the duration to fully repay the mortgage) and the term, which guarantees the interest rate for a certain period.
When considering a mortgage, various options must be weighed, including the type of mortgage (closed, open, high ratio, vendor take-back, convertible), payment schedule (weekly, bi-weekly, monthly), and amortization period. Before committing, it's crucial to compare rates and features from multiple institutions to ensure favourable terms, potentially saving or losing thousands of dollars.
Mortgage Amount:
Lower interest rates can lead to lower monthly payments, potentially allowing for a larger mortgage. However, a larger mortgage entails paying more interest over its lifespan, increasing the overall cost. If feasible without compromising lifestyle, contributing more towards the mortgage can significantly reduce financial obligations.
Down Payment:
Conventional mortgages typically require a 20% down payment of the purchase price, limiting the mortgage to 80% of the appraised value. For those with less than 20%, a high ratio mortgage may be available, requiring a minimum 5% down payment through CMHC (Canada Mortgage and Housing Corporation). Mortgage Insurance is mandatory for high ratio mortgages, with additional costs ranging from 0.6% to 4% of the mortgage amount.
Pre-Approval:
Prior to house hunting, obtaining pre-approval from the bank streamlines the process and provides clarity on mortgage options. Pre-approval ensures knowledge of the affordable home price, protection against interest rate fluctuations, and readiness to make immediate offers, demonstrating seriousness to sellers.
Considerations for Pre-Approved Mortgages:
Evaluate competitive interest rates and flexible features, balancing costs with benefits. Seek a 90-day rate guarantee to safeguard against rising interest rates. Discuss flexible payment options tailored to lifestyle preferences, including frequency and lump-sum payments, and clarify closing costs to avoid surprises.
Most people who purchase a home require some financial assistance. That is, they require someone to lend them sufficient funds to cover the price of a home. Most often, this financial arrangement is handled through a bank or other institution through a MORTGAGE. A mortgage is a legally binding agreement that states a certain party (mortgagor) lends money to another party (mortgagee). The mortgagee agrees to pay back the money at a certain rate, plus interest, over a certain time period.
There are two parts to this financial agreement: principal and interest. Principal is the actual amount borrowed. Interest is the lender's fee you are charged for borrowing. You also have to determine the 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.
When you are considering a mortgage, you have many options to consider such as type of mortgage (closed, open, high ratio, vendor take back, convertible), payment schedule (weekly, bi-weekly, monthly) amortization period. Before you sign any documents, shop at several institutions and compare rates and features. You could save, or lose thousands of dollars when the terms, interest rates and payment schedules are not working in your favor. These items are negotiable.
Mortgage amount:
When interest rates are lower, your monthly payments are lower, so you might qualify for a larger mortgage. However, the larger the mortgage, the more you will pay in interest over the length of the mortgage. Your home will cost you more. If you can afford a bit more, without sacrificing your lifestyle, this will greatly contribute to reducing your financial obligation.
When you are shopping for a pre-approved mortgage, here are some areas to consider:
- Competitive interest rates. Check out all options and interest rates. Sometimes, flexible features may cost more.
- 90-day rate guarantee. You will be protected against rising interest rates while allowing you to take advantage of falling rates.
- Flexible payment options. With these areas, you can tailor the mortgage to your lifestyle. Discuss payment frequency and lump-sum payment options. Can you skip a payment in special circumstances or double-up on your payments?
- Closing costs: Be sure you have a clear understanding of the fees involved.