Arranging your Mortgage doesn't Have to be a Baffling Experience
Buying a home
today is an extremely attractive proposition. Interest rates are at their lowest in
decades and the housing market is full of homes to suit just about any budget or family
requirement. Still, you'll inevitably have to deal with financing and this will mean
taking on a mortgage.
Sorting through
the numerous mortgage options available to today's home buyers can be intimidating for
everyone from first-time purchasers to long-time owners. The rules seem to change
constantly and there's a smorgasbord of terminologies to learn. Fear not -- the
basics are fairly simple and there are a host of real estate professionals more than
willing to help, with your Realtor and bank's mortgage specialist at the top of the list.
Nonetheless,
you'll want to at least familiarize yourself with the mortgage process, how to arrange one
and the different financing strategies involved.
First, it's
necessary to know exactly which kinds of institutions will lend you money. Banks and
trust companies lead the pack, but credit unions and private lenders also offer funds.
There's also an
option to consult a mortgage broker. Mortgage brokers have access to a wide variety
of lending sources, including domestic banks and trust companies, but they can also employ
other alternatives such as pension funds, real estate syndicates and foreign banks.
You may also find
yourself in a situation where you can 'assume' an existing mortgage held by the seller.
Advantages of assuming a mortgage are that you can speed the buying process due to
reduced paperwork and save money in lower legal fees and closing costs. A
disadvantage is that the current lending rate may be less than that of the assumed
mortgage.
Now that you have
an idea who will lend you money, you'll need to know the different kinds of mortgages that
are offered. The most common by far is the 'conventional mortgage.' Lenders
will loan you up to 75 per cent of the appraised value or purchase price of the property
(whichever is lower), and you must come up with the remaining 25 per cent yourself.
Many people save specifically for this purpose, but in some cases, alternate or
'secondary' financing maybe available.
A
'high-ratio' mortgage is one alternative if you don't have the 25
per cent down payment. These are available for up to 95 per
cent of the appraised value or purchase price of the property (whichever
is lower) to a maximum set by government regulation. The provision
is that high-ratio mortgages must be insured.
'Variable-rate'
mortgages are usually offered for both conventional and high-ratio
mortgages. Typically, your monthly payments remain fixed for
the term, while the interest rate fluctuates with economic conditions.
This means that if interest rates climb, you'll be paying more per
month in interest. If rates drop, you'll then be paying more
off your principal. Conversely, 'fixed rate' mortgages maintain
the same rate of interest over the entire negotiated term.
There are some
other concepts to become familiar with that will impact your mortgage and financial
well-being. Amortization refers to the time period in which the mortgage is assumed
to be paid. A common amortization period is 25 years. This means interest and
principal payments are set as if you were paying the amount borrowed over a 25 year
payment schedule. Obviously, the shorter the amortization period, the less interest
you will pay.
Prepayment
privileges are very important for borrowers to consider. These arrangements allow
you to pay money against the principal, reducing the total amount of interest you'll
ultimately pay. Open mortgages generally denote those that allow prepayment
with few restrictions, while closed mortgages carry no prepayment options.
Don't be daunted
by the many concepts and terms regarding mortgages. Arranging one isn't that
difficult--all it takes is a little brushing up on your part and the experience and advice
of a good Realtor or mortgage professional.
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