HELPFUL INFORMATION ON MORTGAGES TOPICS
Sometimes understanding the various terms used by Banks, Realtors, and Mortgage Brokers can be confusing. This shortlist of topics will help you understand the various aspects of negotiating a mortgage and understanding your credit value.
The length of time you agree to take to pay off your mortgage (usually 25 years).
CONVENTIONAL AND HIGH-RATIO MORTGAGES
- Conventional mortgage: A loan that is equal to or less than 80% of the lending value of a home. This requires a down payment of at least 20%.
- High-ratio mortgage: A loan that is over 80% of the lending value of a home. This means the down payment is less than 20% and will likely require mortgage loan insurance.
DOWN PAYMENT OPTIONS
A down payment is that portion of the purchase price you must come up with yourself. There are two ways to determine the initial down payment terms of a mortgage:
- A Conventional Mortgage
- Low Down Payment Insured Mortgage
A Conventional Mortgage requires a minimum down payment of at least twenty percent and is offered on a fixed or variable interest rate basis. Conventional mortgages have lower carrying costs because they do not have to be insured against default.
Low down payment mortgages are exactly what they sound like. They are offered for both new and resale homes but with lower down payment requirements than conventional mortgages. However, they must be insured to cover potential default of payment and as a result, their carrying costs are higher due to the insurance premium.
It’s a good idea to get pre-approved for a mortgage before you start looking for a home. But first you need to understand exactly what being “pre-approved” means. A pre-approved mortgage lets you know:
- How much you can afford?
- What your interest rate will be?
- What your monthly mortgage payments will look like?
Getting pre-approved can help you narrow your search down to a specific home type, size or neighbourhood. Getting pre-approved is not a guarantee of final approval for a mortgage. Once you find the home you want to buy, the property still has to be evaluated to ensure the price and condition of the home are acceptable to your lender.
The length of time that the options and interest rate you choose are in effect. It can be anywhere from 6 months to 10 years. When the term is up, you can renegotiate your mortgage and choose the same or different options.
OPEN AND CLOSED MORTGAGES
- Open Mortgage: Lets you pay off your mortgage in full or in part at any time without any penalties.
- Closed Mortgage: Offers limited (or no) options to pay off your mortgage early in full or in part, but it usually has a lower interest rate
How often you make your mortgage payments. It can be weekly, every two weeks, or once a month.
TYPES OF INTEREST RATES
- Fixed Rate: Doesn’t change for the term of the mortgage
- Protected (or Capped): Fluctuates but will not rise over a pre-set maximum rate
- Variable Rate: Fluctuates with market rates
TYPES OF MORTGAGES
In short, there are three types of mortgages:
- Closed Term Mortgage: An excellent choice if you are not planning on paying off the mortgage in the short term. Interest rates are generally lower. If you wish to renegotiate your interest rate or pay off your mortgage balance prior to the end of its term, you will be required to pay a prepayment change.
- Variable Closed Term Mortgage: Gives you the same benefits as a closed term mortgage, but it can be converted to a longer, closed term at any time without prepayment charges, should your variable rate no longer meet your needs.
- Open Term Mortgage: Might be suitable if you are planning to pay off your mortgage in the near future. They can be repaid either in part or full at any time without prepayment charges. Open mortgages can be converted to any other term, at any other time, without a prepayment charge. However, this prepayment flexibility results in higher Interest rates.