One of the
first steps in buying a new home is to take a realistic look at what you can
afford and how you are going to pay for it. If you are like most people, you will
probably have to finance your home purchase with a mortgage loan.
What is a mortgage?
A mortgage is a loan that uses home you buy as security. This loan is registered as a legal document against the title of your property. Here’s a quick overview of some of the most common aspects of a mortgage that you need to understand.
What is a mortgage?
A mortgage is a loan that uses home you buy as security. This loan is registered as a legal document against the title of your property. Here’s a quick overview of some of the most common aspects of a mortgage that you need to understand.
§ The
principal is the amount of
the loan, or the cash actually borrowed.
§ The
interest is the amount the
lender charges for the use of funds, or principal. Interest rates vary according
to many factors, including terms and conditions of the mortgage. Mortgage
payments are applied toward both principal and interest.
§ The
amortization period is the
actual number of years that it will take to repay the entire mortgage loan in
full. This normally ranges from 15 to 25 years.
§ The
term is the length of time
for which a mortgage agreement exists between you and your lender. Typically,
terms range between six months and seven years.
§ The
maturity date marks the
end of the term, when you can either repay the balance of the principal or
renegotiate the mortgage at then current interest rates.
§ Options let you tailor the mortgage to fit your
personal needs and circumstances. Open or closed mortgages, pre-payment
options, fixed or variable rates or portable mortgages are just a few of the
available options.
Types of Mortgages
There are two basic types of mortgages:
There are two basic types of mortgages:
§ Conventional
Mortgage: The loan amount
does not exceed 75% of the property value, defined as the lesser of the
purchase price or the appraised value.
§ High-ratio
Mortgage, or National
Housing Act mortgage: The amount is more than 75% of the property value (up to
95%). By law, a high-ratio mortgage must be insured against borrower default.
The borrower pays a mortgage insurance premium (a percentage of the total loan
amount) which can be added to the mortgage loan or paid in a lump sum in
advance. The borrower must also pay an insurance application fee.
(Source: Canadian Home Builder’s
Association)
philromano@vhme.ca
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