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Provide best solution for all your financial need. The following the mortgage basics for new home owners to learn more about their options. Its also a good idea for existing home owners to review and refresh their concept about mortgage. At
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Mortgage
Basics
(Source
CMHC)
Mortgage payments are made up of a principal sum (the amount borrowed) and
interest (the cost to you of borrowing money).
The best plan for any type of mortgage is to minimize the amount of
interest you pay ！ and lenders offer several ways to help do this:
-
A larger down payment
means your home ultimately costs less because a smaller mortgage means
less interest.
-
A shorter
amortization, the period over which a loan is repaid.
-
A weekly or biweekly
payment schedule, instead of monthly.
-
Additional lump sum
payments.
You don¨t have to get
your mortgage from the same place you have your savings or chequing
accounts. Also, at the end of each term, you may be able to change the
options of your mortgage, such as the payment schedule, the term, the
rate, even who holds the mortgage.
Mortgage Features
Prepayment
Ensure that you have some form of prepayment clause in your mortgage that
will allow you to pay down your mortgage with a lump sum, or an extra
payment, without penalty.
Portability
This means you can transfer the terms and conditions of your mortgage to
your next home. For example, this may allow you to keep a low interest
rate if you sell one house and buy another.
Assumability
This means you may be able to assume (take over) the existing mortgage on
the property. It may have attractive features, such as a lower interest
rate than the prevailing market. In turn, an assumable mortgage may be a
selling feature for you when you decide to move on in the housing market.
Expandability
This lets you expand the principal on a first mortgage at the lenders
agreed-upon rate of interest. This can be a cost-effective way to finance
a home renovation.
Types of
Mortgages
Conventional
Mortgage
This mortgage is for an amount which does not exceed 75% of either the
appraised value of the property or the purchase price, whichever is lower.
Your down payment is a minimum 25% of the purchase price.
High-ratio Mortgage
With this type of
mortgage, you contribute less than 25% of the cost of the home as a down
payment and as little as 5%. A high-ratio mortgage requires mortgage loan
insurance. CMHC offers Mortgage Loan Insurance for a premium of between
0.5% and 3.75% of the mortgage amount. This premium can be added to your
mortgage payments or paid in full on closing.
Second Mortgage
This usually has a higher interest rate and shorter amortization than a
first mortgage. Secondary financing is often used to make renovations to a
home. You can achieve mortgage freedom sooner by increasing the frequency
of your payments. By making payments every two weeks, instead of monthly,
a 25-year mortgage can be reduced to 20 years.
Mortgage Options
Assuming an Existing
Mortgage
You take over the vendors mortgage as part of the price you pay for the
house. Assuming an existing mortgage is quick and saves you money on the
usual mortgage arrangement fees, such as appraisals and legal fees.
When you assume a mortgage, you don¨t have to arrange financing from
another lender and the rate on an existing mortgage may be lower than the
prevailing market rate. Sometimes, if it is specified in the original
mortgage agreement, a mortgage can be assumed automatically. If not, you
may have to qualify with a lender first.
Vendor Take Back (VTB)
Mortgage
This means the vendor lends you the money to purchase the home. It¨s
basically a second mortgage. For example, on a home that costs $150,000,
if the vendor has an existing mortgage of $70,000 that you can assume and
you have $40,000 for a down payment, the vendor may lend you the
outstanding $40,000, which you pay back monthly.
The vendor may be able to offer this loan at less than bank rates. Some
vendors will sell this mortgage to a mortgage broker instead of holding it
themselves.
Interest Rate Buy Down
A vendor ！ usually a new-home builder ！ pays the lender a lump sum to
lower the mortgage interest rate by up to 3% over a fixed term, usually
one to two years. A payment of $2,000-$3,000 reduces your mortgage rate by
about 2%, increasing the mortgage amount for which you qualify.
New-home builders may offer buy downs or discounts on the mortgage rate to
encourage sales. But vendor financing is usually not renewable, so you
have to be prepared to pay the going market rate when the mortgage is
renewed. However, the builder may add the amount into the price of the
home and you may end up paying a higher mortgage principal.
Rate of Interest
Interest is the cost of borrowing money and is paid to the lender.
Mortgage interest rates are affected by the prevailing market interest
rates. Mortgage rates are either fixed or variable. A fixed rate is locked
in so that it will not rise for the term of the mortgage.
A variable rate will fluctuate. The rate is set each month by the lender,
based on the prevailing market rates. Your monthly payment is fixed to be
the same each month for the term of the loan, but the percentage of each
payment that goes toward the interest, and the percentage that pays down
the principal, changes.
A variable rate can be a good choice if rates are high when you arrange
your mortgage and then fall afterward. But if rates rise, you may want to
convert to a fixed rate. Bear in mind that this can cost you a cash
payment penalty. If you select a variable rate, your lender may restrict
the mortgage amount to 70% of the purchase price of the home and require a
higher down payment on either a conventional or a high-ratio mortgage.
Also, some lenders offer a protected or capped variable rate. This means
your interest rate will not rise above a predetermined limit. However, you
usually pay a premium for this protection.
Term
The term of a mortgage is the length of time that certain factors, such as
the interest rate you pay, are set at a negotiated level. Terms usually
last anywhere from six months to 10 years. At the end of the term you
either pay off your mortgage or renew it, possibly renegotiating its terms
and conditions.
Generally, the longer the term the higher the interest rate. Many experts
suggest you select a long term if interest rates are rising. If rates are
falling, you may want to select a short term and then lock in the rate
when you think rates won¨t go any lower. Note that the term is not the
amortization period.
Amortization
This is the amount of time over which the entire debt will be repaid. Most
mortgages are amortized over 15-, 20- or 25-year periods. The longer the
amortization, the lower your scheduled mortgage payments, but the more
interest you pay in the long run.
Markham Head Office:
905-940-2783
Richmond Hill:
905-886-2118
Mississauga Office:
905-896-8868
Danforth Office
416-693-8630
Ajax Office:
905-686-0470
Dundas Office:
416-916-0630
Woodbine Office:
Tel: 905-470-9890
Fax: 905-470-0067
Calgary Office:
403-272-6969
Edmonton office:
Tel: 780-669-7284
Fax: 954-736-3828