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 interest (the amount charged for borrowing the money). Payments can be made once a month, bi-weekly, or weekly, depending on availability from the lender.
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.
It is often recommended to get pre-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
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.
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.
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 the maturity, there will be a penalty charge for breaking that mortgage. This penalty is customarily three months interest, or the interest rate differential.
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.
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 for a short term mortgage and the security of a long term, in one mortgage. Your mortgage can be split in to 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 Six Months Convertible Mortgage
When interest rates go down, or you suspect that they will in the approaching future, a 6 months 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 months 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 Land 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 Land Canada; 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.
- The costs banks and mortgage companies charge usually include the following:
- Application fee - the money paid to the lender for processing the mortgage documents
- Insurance - homeowner's coverage for fire and casualty to the home
- Origination fee - A fee, often a percentage of the total principal of a loan, charged by a lender to a borrower on initiation of the loan
- Closing costs - The numerous expenses (over and above the price of the property) that buyers and sellers normally incur to complete a real estate transaction.
- Interest - the cost of using the money, based on a percentage of the amount borrowed.
Amortization is the paying off of the mortgage debt in regular installments over a period of time. If you pay the same monthly amount according to the terms of your note, then your debt will be paid in the exact number of years outlined for you.
The credit score is calculated by a statistical process and provides a guideline for lenders to extend credit (and if so, how much) to a borrower. Mortgage companies, banks, and insurance companies determine the interest rate they will charge based on the borrowers credit score. The credit scoring process encompasses both your pay history and the amount of credit you currently have. The credit score is a substantial portion of the entire credit report.
Low Credit Scores will result in higher payments on loans, credit cards, and insurance. The credit score is sometimes called the FICO Score, which is an acronym for the creators of the FICO score, Fair Isaac Credit Organization.
Below is a table showing different score ranges
Perfect (720 – 780)
Excellent (675 – 720)
Average (620 – 690)