For many people, buying a home outright isn’t an option. You’re able to come up with a down payment for your future home but getting together the full amount is near impossible. Real estate is expensive and unless you have a large sum of money at your disposal, you will need help. This help will come in the form of a mortgage.
A mortgage is a specific loan designed to allow you to purchase a property. However, instead of giving you the entire amount you need to borrow at once, you’re given some flexibility. The lender – the company that gives you the mortgage – lets you pay it back over a long period of time. You can pay back your mortgage in weekly, bi-monthly or monthly increments
A mortgage is comprised of four elements: Principal, interest, term and amortization.
Principal: This is the amount of money that you’re being loaned. For example, you could be borrowing $250,000 from the lender to complete the purchase of your home. This $250,000 is the sale price of the property minus the amount you’ve come up with for a down payment.
Interest: This is the fee that comes with borrowing money. By charging interest on your mortgage, you are actually paying back more than you’re lent; however, that amount is not that big. The amount of interest you’re charged is dependent on your credit score and other factors. When you pay off your mortgage, some of the payment goes towards the interest, while the rest is put towards the principal. After the interest is paid off, the bulk of your mortgage payments can go towards the principal.
Term: This is the years during which the framework of the mortgage are legally in effect. Once the term has expired, you will be able to renew your mortgage or pay off the remaining balance.
Amortization: This is the amount of time allotted for you to pay off your mortgage. Amortization periods can range anywhere from 10 to 35 years. The longer your amortization period, the lower your monthly mortgage payments will be. The shorter your amortization period is, the less interest you’ll pay on your mortgage.
Conventional mortgage: When your down payment is equal to 20% or more of the property’s purchase price, this is considered a conventional mortgage (sometimes referred to as a low ratio mortgage). No insurance is required on these mortgages.
High ratio mortgage: When your down payment is less than 20%, this is considered a high ratio mortgage. You will need to have insurance on this kind of mortgage which you can get through the CMHC, Genworth Financial or Canada Guarantee.
Open mortgage: When you have an open mortgage, you can make extra payments on the mortgage whenever you want without incurring a penalty. This means you can make your monthly payments and make additional payments towards the mortgage as you see fit.
Closed mortgage: Unlike an open mortgage where you will can make extra payments as you want, with a closed mortgage, you cannot without penalty.
Fixed rate mortgage: This type of mortgage requires the interest rate to remain the same during the mortgage’s term.
Variable rate mortgage: Also known as an adjustable rate mortgage, this type of loan is set up like a regular mortgage, but the interest rate can be re-examined and changed at predetermined intervals throughout the term.Back
Your home is your most valuable asset. It is probably the single largest investment you will make in your lifetime. Your home is more than a place to rest your head and raise a family. Your home contains equity. It is a treasured resource and in some cases, can even be used as an ATM (aka cash back mortgages and HELOCs – don’t worry we’ll get there).
Everyone who is looking to purchase a home will need a mortgage. But, what is a mortgage exactly and why do you need it? Besides being the term to describe a loan secured by real estate, a mortgage allows you to access funding to procure your dream home.
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