Home Buyer's Guide - All About Mortgages
A Step-by-Step Guide on the Home Purchase Process
What effects your credit and how to improve your credit
Understanding what you can afford and what is looked at when getting a mortgage
What is required for a down payment on a home and other solutions to obtaining the required funds
Understanding the basic Mortgage Options
A list of the costs you should be prepared for
Understand the Mortgage Options that are available to you
Mortgage Payments are a combination of principal & interest. These payments are amortized over a specific amount of time and you are obligated to make these payments to the lender until the end of your mortgage term.
Principal is the sum of money lent or invested on which interest is paid.
Interest is the money paid regularly at a particular rate for the use of money or for delaying the repayment of a debt.
Term is the length of time you are committed to a mortgage rate, lender, and conditions set out by the lender. At the end of the term your mortgage will be due and you can either pay it out, renew with that same lender, or switch to a lender with better options.
Amortization the length of time it takes you to pay off your entire mortgage.
25 year Amortization - Less than 20% down payment
30-35 year Amortization - 20% or more down payment
Monthly - payments are made once per month / 12 payments per year.
Example: 1st of every month
Semi-Monthly - payments are made twice a month / 24 payments per year.
Example: 1st & 15th of the month
Bi-Weekly - payments are made every 2 weeks / 26 payments per year.
Example: Every other Friday
Accelerated Bi-Weekly - payments are made every 2 weeks / 26 payments per year.
Example: Every other Friday
*you will be making higher payments than a regular Bi-weekly, which will help you pay down your mortgage faster
Weekly - payments are made ever week / 52 payments per year.
Example: Every Friday
Tips on Choosing a Payment Method
Choose a payment schedule that is the most convenient for you. You can always use your payment privileges to put more money down every month and pay off your mortgage faster.
Interest Rate - used to determine how much interest should be charged or paid for the use of money.
Fixed Rate is an interest rate charged on a loan will remain fixed for that loan's entire term, no matter what market interest rates do. This will result in your payments being the same over the entire term.
Variable Rate is an interest rate that varies as market interest rates change. Mortgage payments either change with fluctuations in the prime rate, or the interest portion of the payment varies.
Open allow you to prepay any amount of your mortgage at any time without a prepayment penalty. Interest rates on open mortgages tend to be much higher.
Closed restricts how much you can payoff during the term of the mortgage but usually have much lower interest rates than an open mortgage. To payout your mortgage during the term you will be subject to a penalty of three months interest or the Interest Rate Differential (IRD) whichever is higher. Most lenders give you the option to prepay up to double your regular payment each month as well as an annual lump sum each year without penalty. It is very important to know your prepayment privileges before getting into a mortgage.
Tips on Interest Rates
What are your life goals and plans over the next few years? The Mortgage Duo will help you choose a product that best meets your needs. With a Variable Rate you may have the option to lock into a Fixed Rate at any time. And with a Fixed Rate remember that you do have the option to port your mortgage or have someone assume it, so let this play into your decision.
Portable - This option allows you to transfer your existing mortgage from one home to a new home when you move. Having this option can help you avoid paying a penalty by breaking your current mortgage terms.
Assumable - This option will allow you to have a qualified buyer take over your mortgage if you decide to sell your home. Assuming a mortgage can provide a buyer with a below market interest rate, (if rates are now higher), as well as saving on the legal costs of creating and registering a whole new mortgage. "Assumption" entails a simple amendment to the mortgage document registered on title.
Lump Sum – Most lenders offer you the option to pay anywhere from 10% - 20% of the original mortgage balance each year in lump sums.
Payment Increase – Lenders will offer you the option to increase your payments once a year by 10% - 20%. Or Double-up / match a payment.
Tips on Privileges
We all want to pay off our mortgage as fast as possible. Take advantage of your Prepayment Privileges. You can setup automatic lump sum payments, which can be cancelled at any time. Also, if you feel you are comfortable making a higher payment, increase your regular payment amount.
Prepayment Penalties – Unless you choose an 'Open' Mortgage, you will pay a penalty If you break your contract before the term is up. These penalties are based on the mortgage options you chose when you secured your contract. You will pay one of the following:
IRD – An Interest Rate Differential penalty for early prepayment of all or part of a mortgage outside of its normal prepayment terms. This is usually calculated as "the difference between the existing rate and the rate for the term remaining, multiplied by the principal outstanding and the balance of the term".
3 Months Interest Penalty – Equivilent of three months of interest payment.
Tips on Penalties
To avoid paying a penalty, you can Port your mortgage or have someone assume it. You also have the option of an 'Open' Mortgage, which comes with a higher interest rate, but gives you the flexability to pay off your mortgage without penalty.