Applying for a mortgage can seem overwhelming. When you understanding your mortgage and the process of it, you can make decisions with confidence.
What Is a Mortgage?
A mortgage is a loan secured by real estate. A lender, usually a bank or credit union, supplies your mortgage. You pay it back in blended payments of interest and principal.
DID YOU KNOW? “The key to saving money on your mortgage is to pay off the principal as fast as possible. If you can make extra payments under the terms of your mortgage, the lender will apply them directly to the principal. By reducing the principal, you can save thousands, or even tens of thousands, of dollars in interest charges.” (Government of Canada)
What is a Pre-approval Mortgage?
Being pre-approved for a mortgage saves you time. It helps establish your price range. It also guarantees you the best rate for the period you negotiate with your lender. A thorough pre-approval is important before you start shopping. Your lender will require income verification and a credit check. They will fully vet you before you begin viewing real estate.
Understanding your Mortgage and Types of it
Many types of mortgages are available. These include:
- Open Mortgages: An open mortgage offers the most flexibility. It’s best for homeowners who want to make large payments with no penalties. This freedom usually comes with fluctuating interest rates.
- Closed Mortgages: A closed mortgage has a strictly predetermined interest rate. This rate applies for a predetermined period. One cannot renegotiate, refinance, or prepay their mortgage. Lenders will penalize them if they do so.
- Convertible Mortgages: A convertible mortgage lets homeowners start their term with open mortgage benefits. They can then change to a fixed-rate closed mortgage anytime during their term.
- Hybrid Mortgages: A hybrid mortgage allows homeowners to split their mortgage. They divide it into multiple parts. Each part has its own interest rate and terms. Homeowners benefit from both fixed and variable interest rates. They also protect themselves from possible market fluctuations.
- Reverse Mortgages: A reverse mortgage allows homeowners 55+ to access their home equity. This is the amount they have paid into their mortgage. Lenders return it to them as a loan. The loan is not due for repayment until the homeowner moves, sells their home, or passes away.
Your mortgage broker can provide you with information. They will explain the pros and cons of the various options.
Term vs. Amortization: Key Mortgage Terminology
Understanding terminology helps you understand your mortgage. Remember “mortgage term” and “amortization period.” These two phrases often cause confusion among new home buyers. They have similar definitions but different meanings.
A mortgage term refers to the period you commit to the mortgage’s terms and conditions. This includes the interest rate and lender. A mortgage term can range from 6 months to 10 years. At the end of the term, you can renew your mortgage. You can also refinance it, or pay off the remaining balance in full.
The amortization period refers to the time it takes to repay your entire mortgage. A shorter amortization period results in higher monthly payments but lower interest payments. In contrast, a longer amortization period results in lower monthly payments but higher interest payments. The average maximum amortization period is 25 years. However, buyers who pay a down payment of 20% or more may qualify for a longer amortization period. I encourage you to discuss your options with your mortgage specialist. Find the best mortgage term and amortization period for you.
What If I Sell Before My Mortgage Term Is Up?
If you decide to move on from your home with time left on your mortgage term, you have some options. If you are buying and selling a home simultaneously, you may transfer your existing mortgage. This includes its interest rate and terms, to the home you are buying. This is also known as “porting” your mortgage. If you need a larger mortgage for your new home, your mortgage lender may offer a “blend and extend.” Here, your lender renegotiates a new interest rate, combining your previous rate and the current average. If you are buying a home with a mortgage value lower than your current mortgage, you may need to make arrangements with your lender. There could be a penalty. That’s another point why its helpful understanding your mortgage.
If your home’s value has increased since purchase, you can use the sale proceeds. These proceeds pay off the remainder of your mortgage. Depending on your mortgage type, you may face a prepayment penalty fee. Most mortgage lenders have a prepayment penalty calculator on their website. The prepayment penalty fee cost depends on your mortgage lender and various factors. These include how much time remains in your term, your interest rate, and how much you are prepaying.
Many things require consideration when purchasing a home. I am committed to helping you with real estate. Whether you have questions about understanding your mortgage or wish to discuss your home’s current value, call me at 604 302 0177 — let’s talk!