Understanding Mortgage

Understanding Mortgage

So you desperately want to buy a house, but do not have the money to pay for it upfront?

Stop fretting! You are among the millions of those who find it extremely hard to pay the full purchase price of a property at a go.

And just as there are problems, so there are solutions! To meet the aspirations of homeowners, the facility of taking a loan, or mortgages, is available.

What this means is one can borrow money from financial institutions, like banks, and gradually pay the amount back with interest over time.

While this sounds easy-peasy, the fact is there are several pointers you must keep in mind before you apply for a mortgage. This is because there are many different types of mortgages and each of them has different features. You have to research these in detail to discover the best-suited for yourself.

The working of a mortgage

When a loan is taken specifically to buy a house, it is known as a mortgage. As discussed earlier, many people lack the amount required to make a one-time payment for a house. That is when they require a mortgage to pay the entire amount.

Once the mortgage is secured, the borrower has to pay the payments as per the decided-upon schedule.

Interest rates

No one would like to lend their money without charging interest on it. After all, they would like to use their money to make more money.

Most would-be borrowers think about the rate of interest before they decide on the actual act of borrowing. One can say that the rate of interest is the cost they pay for borrowing.

If the rate of interest is high, this cost – which reflects on your monthly payments – goes up, and vice versa.

In Canada, lenders offer interest rates on the basis of the prime rate from the Bank of Canada.

Mortgage types

Mortgages are of different types. These are:

• Fixed-rate mortgage –

in this type, the rate of interest you pay will remain the same for the entire repayment period. Basically, your repayment is locked at a certain amount, which helps you with knowing the exact amount you will have to pay monthly.

• Variable-rate mortgages –

in this type, you get a discount by paying less than fixed rates. If the rates fail, you will be able to save more. But if they rise, you will have to fork out a bigger amount.

• Closed-term mortgage –

this option offers lower rates of interest, and this is the reason why most homeowners prefer it. However, if you would like to renegotiate the mortgage or pay the balance before the payment period, you may have to pay a penalty. Some closed-rate mortgages do have prepayment privileges for you to make additional payments without paying the penalty.

• Open-rate mortgage –

  In case you think you would be able to repay your mortgage in the near future, you should go with this option. It allows you to pay off part or the entire amount without worrying about penalties. Also, in this option, you can convert the mortgage to another term without paying any fees. However, this option has higher interest rates.

Amortization period

Almost all mortgages are large sums of money. Typically, these are paid back over many years. This time is called the amortization period.

A common amortization period for new homeowners is 25 years. Some people go for a longer period of 30 years. While in a longer time period, the monthly payment is lower, there is an increase in the interest amount charged over the life of the mortgage.

If you have to renew your mortgage, you would have to reduce the amortization period as by now you would have built up some equity.

The period of your contract with a lender is called your mortgage term. This usually is for five years but it can vary between one to ten years as per specific cases.

While a long term costs more, its rate is locked-in. On the other hand, a short term has lower rates, but once the term ends you will have to go for renewal at the current rates.

Frequency of payment

There are many payment options you can choose from. You can take a good look at your incoming amount to decide on which option would be the most suitable for you.

• Monthly – in this, you have to pay once a month.
• Bi-weekly – in this option, you pay every other week. There is an accelerated bi-weekly option too.
• Weekly – if you go with this option, you will have to pay once a week. There is an accelerated weekly option too.

Requirements

There are certain aspects lenders consider before they fork over the loan amount. These are:

• Your creditworthiness
• Down payment
• A secure income

If your credit score isn’t too good, don’t worry – you may find lenders willing to lend you the money albeit at a higher interest rate.

Lenders use two calculations, Gross Debt Service (GDS) Ratio and Total Debt Service (TDS) Ratio to determine the maximum amount you can afford to borrow. Do know that there are other factors you should keep in mind before you decide on the amount you want to borrow. These are costs that come later, like retirement, vacations, etc.

The bottom line is choosing a mortgage is not a quick process. Spend some time and shop carefully for a mortgage; after all, you will be stuck with it for a long time to come.

If you feel confused, ask a mortgage specialist for help. You can also speak with a mortgage broker to check the best options out for you.