Mortgage
Mortgage Basics - A mortgage is
simply a long-term loan secured using real estate as collateral.
To get a mortgage, you have to fit the criteria that lenders apply to
any application for a loan - you need a certain level of income,
employment stability, low or manageable debt load, and a good credit
history amongst other things. Even though qualified borrowers can
choose from a number of different mortgage options, some things are
constant from mortgage to mortgage and lender to lender.
The Interest Rate, Amortization Period and other conditions between
the borrower and the lender are specified in a legal document called a
Mortgage Loan Agreement. The agreement stays in effect for
a time period called "Term" of the mortgage - usually six months to five
years, but sometimes longer. A typical mortgage amortized over 20
years might end up divided into four terms - say 4 five-year terms -
each renewed at the interest rate set by the lender at the time of
renewal.
A mortgage is due and payable at the end of a term. At that
time a borrower may either pay off the amount owed, renew the loan with
the same lender or change to a different lender. If borrowers
cannot meet their payments, lenders can "foreclose" to take possession
of the property before the term is up.
Mortgage Insurance is available through financial institutions and
life insurance companies and the cost vary depending on how much of the
home's value is being borrowed. Mortgage Insurance protects
lenders against borrower default and remains in force for the life of
the mortgage.
Mortgage Options -
A "pre-approved" mortgage can be set up before you shop and
guarantees rate, term, payment periods and other conditions for a
certain period of time.
"Fixed rate" mortgagees are structured so that each loan
payment is the same amount, based on an interest rate that doesn't
change during the term.
"Variable rate" mortgages also have standardized payments, but
the interest rate can fluctuate from month to month as the Bank of
Canada rate varies. When interest rates rise, more of the interest
portion is paid and a smaller portion goes toward the principal. In time
of falling rates, less interest is paid and more goes to the principal.
"Open" mortgages let you pay off all or part of the principal
without penalty before the end of the term, cutting down on your total
interest cost. There may be a fee to do this and the interest rate is
usually higher than that of a closed mortgage.
"Closed" mortgages allow only regular, agreed-upon payments to
be made but usually carry a lower interest rate.
"Assumable" mortgages let Buyers take over a Seller's loan,
with conditions intact, if the Buyer meets the lender's criteria.
Interest - Interest is what you
pay for using a lender's money and it is usually a percentage of the
amount you borrowed. Theoretically, if you borrowed $100 at 10%
annual interest, you would pay $10 per year in interest. In real
life, payments usually pay the interest first and repay some of the
money borrowed (the principal), too. This is called a "blended"
payment. Loan payments are made during a set length of time called
the "amortization period". Common amortization periods would be 20
or 25 years. The longer the amortization period, the smaller your
monthly payment will be. However, the amount of the interest paid
goes up substantially as the amortization period increases.
Payments - Most mortgage payments are made once a month,
but other options would be twice a month, every two weeks, or even in
some cases, weekly. Usually, your principal (the amount
still owed) is reduced more quickly if you make more frequent payments
and you will end up paying considerably less interest over the full term
of the mortgage.
< Back To Financing
|
