Life is full of special moments. One in particular could be purchasing a home, for which you’ll probably need to obtain your first mortgage. If you’re in that situation, congratulations. But where do you even begin?
Let’s start at the beginning.
You’ve found your dream home and can’t wait to fill it with furniture. Start with your financial institution and get a preapproved mortgage. This will give you an idea of what you can afford and if you’re able to purchase your dream home or something more modest. Your quoted interest rate will be guaranteed for 90 to 120 days (depending on your institution), should the rate increase during that period.
Next, there are two types of mortgages: conventional mortgages and high-ratio mortgages. A conventional mortgage is when your mortgage covers less than 80 percent of the property’s lending value. For example, if your home costs $200,000, you'd require a mortgage for $160,000 or less. A high-ratio mortgage means that you're borrowing more than 80 percent. In this situation, your financial provider will require you to get loan insurance.
Once you’ve figured out your mortgage amount, you need to choose what kind of term you want. Before deciding, think carefully. A longer term protects you from interest rate increases. A shorter term could be a benefit if you think the rate will decrease in the near future. If you’re unsure of what type of term to choose, discuss this with your lender.
Mortgage interest rates work in a few different ways. You can lock in your interest rate so that it will not change within the length of your term. This is called a fixed rate mortgage. If you want the interest rate to change according to the market, you’ll want the variable rate.
You may ask what the difference is between a closed and open mortgage. A closed mortgage is meant for making normal payments and nothing more. If you want to make extra payments towards your closed mortgage, there are usually restrictions or penalties. Many people like the closed mortgage if they’re on a tight budget. An open mortgage gives you the option to pay off the mortgage faster with extra payments at any time. The open mortgage might be recommended if you’re planning to resell your home in the near future.
The time it takes you to pay off the mortgage is called amortization. Many people schedule their mortgages to be paid over 25 years. Payments can be made monthly, biweekly, or weekly. This is called the payment structure. The more payments you make, the less interest you pay, because each time you make a payment, the principal gets lower.
Let’s recap. Conventional mortgage or high-ratio mortgage? How long do you want to have your mortgage for? How about the interest rate? Is the mortgage open or closed? What’s the payment structure?
Visit your local financial institution for any questions you might have.
