STEPS TO HOME OWNERSHIP (The Mortgage Process)
May 13, 2020 | Posted by: Mike Garganis
Ready to take the plunge and become a homeowner? Then it’s time to think about getting pre-approved for a mortgage. Financial concepts can be tricky. We get so caught up in trying to understand what the offerings are that often we forget the simple things, which tend to be the most important.
Lending institutions will usually require you to make a down payment towards the total cost of the house upfront. Lenders typically require a 20% down payment, but many mortgage providers will be willing to arrange a mortgage with a down payment of as little as 5% to 10%. As a general rule, you should make your cash down payment as large as possible.
What exactly is a mortgage? Basically, a mortgage is a loan to buy a home. Interest is charged on the amount you borrow (the “principal”) and each payment consists of repayment of the principal, plus interest. Mortgages are available from several types of lenders, including banks, credit unions, mortgage companies, insurance companies, trust companies and loan companies.
Typically, a mortgage payment is calculated as if the loan is going to be paid over an amortization period of 20 or 25 years. The longer the amortization period, the lower the payment will be. Keep in mind that the faster you repay any money borrowed by choosing a shorter amortization period, the more you reduce the total cost of borrowing.
Mortgages only allow payments to continue for a specified term which is shorter than the amortization period. The term can be as short as six months or for a period of five years or more. At the end of the term, you’re required to repay the full unpaid balance or refinance the loan for another term. Keep in mind that the original mortgage provider is under no obligation to renew your mortgage at the end of the term.
Lenders follow the 28/36 rule, which states that a household should spend a maximum of 28% of its gross monthly income on housing expenses (mortgage payment, property taxes and insurance); it should spend no more than 36% on total debt service, including housing and other debt such as car loans. Accordingly, you’ll need to provide your lender with the following:
• proof of employment
• proof you can pay for the down payment and closing costs
• information about your other assets, such as a car, cottage or boat
• information about your debts or financial obligations
One of the most important aspects of a mortgage is the interest rate. The prime rate is an interest rate used by banks, usually the interest rate at which banks lend to those with good credit. With a fixed-rate mortgage, the mortgage rate and payment will stay constant for the term of your mortgage. With a variable rate mortgage, however, the mortgage rate will change with the prime lending rate.
Armed with the basics, you can now negotiate your mortgage contract. Focus on key points such as:
• interest rate (type and percentage)
• amortization and term period
• payment and prepayment options
• ways to save on interest (i.e., bi-weekly mortgage payments rather than monthly)
• optional life, critical illness, disability and employment mortgage insurance
• penalties if you sell the property before the end of your term
Once the loan is approved, the closing attorney notified and closing fees verified you will be scheduled to sign the loan documents. Carefully review the documents and keep in mind that your mortgage provider now has an interest in the property until the term is over and/or the mortgage is paid in full and thus, will be registered on the property title at the BC Land Titles and Survey Authority office.
The Government of Canada, Canadian Mortgage and Housing Corp. (CMHC), as well as most financial institutions, provide an online user-friendly mortgage calculator tool to help clarify your financial situation before speaking with a mortgage provider.
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