A Beginner’s Guide to Mortgages
Buying a house is one of the most exciting and terrifying decisions you’re likely to make in your life.
Finding that perfect forever home, designing the interior, repainting the exterior, and landscaping the yard to make the house a real home for you and your family are a lifetime adventure. But there is also that other aspect of taking a significant loan that changes your whole financial structure.
So before you make that life changing decision of buying the home of your dreams, you need to be familiar with the whole concept of mortgages and what it means to have a mortgage debt.
This, along with other aspects of mortgages will be covered in today’s article so stick with us to find out more about it and determine whether a mortgage is the right choice for you.
What Is A Mortgage?
Simply put, a mortgage is a loan you take out to buy real estate and secured by a real estate.
It could be the same property you bought or another one you own, either way it will be used as a collateral if you’re unable to pay off the mortgage.
Before you sign your name on the dotted line of a mortgage agreement, you need to be familiar with the terms you will read in the agreement itself.
- Variable Rate Mortgage or Adjustable Rate Mortgage (ARM) – A home loan whose interest rate can change depending on the global fluctuations and market forces. The agreement usually contains a cap interest rate to ensure it doesn’t go too high, regardless of the federal interest rates.
- Fixed Rate Mortgage – A mortgage loan where the interest rate is determined upfront and doesn’t change throughout the duration of the mortgage agreement or until the mortgage is fully paid off. You can refinance it later on for a mortgage with a lower interest rate, but the original rate cannot change.
- Term – the period up until when your mortgage is up for renewal
- Amortization – The period in which you have to repay the full mortgage.
- Closing costs – The total costs of seeing through the whole home-buying process with the exception of the property price itself. Typical closing costs are agent fees, lawyer fees, title insurance, etc.
- Prepayment Penalty – The cost you will need to pay if you choose to repay your mortgage earlier than the date that is written in the agreement.
How to Qualify for a Mortgage?
Some of the major determinants to qualify for a mortgage are your credit score and income, versus the value of the property you want to buy.
- Your credit score shows how good you’ve been handling your finances in the past and allows the lender to determine if you would be able to repay a mortgage. If you’ve previously taken out other loans and repaid them without delays, this will be a good sign for the bank and will receive a higher ranking.
- Your income directly impacts your ability to repay the mortgage timely so logically, the lender would want to see proof of it. You would be required to present a proof of a steady income, savings and financial stability. The bank will comb through all paperwork provided by you and do an additional background check to ensure that you wouldn’t default during the mortgage term.
- Finally, these two factors will be leveraged against the value of the property you want to buy. As the property will be offered as a collateral, the lender wouldn’t be willing to lend you a bigger loan than the market (appraised) value of the property. However, accordingly, any loss of value of the property will be suffered by the lender if the receiver of the loan defaults.
How Much Can You Get?
Several conditions and circumstances determine if and how big of a mortgage you can take out.
After you’ve been analyzed for the previous conditions, the next step a lender would take is to determine the maximum amount of loan you can take.
Usually, the amount a lender would allow you to take out is around three times of your gross annual income. However, lenders use complex calculators based on your income and expenses to determine the exact amount you would be allowed.
They also include other factors in the calculation such as your current bank balance, real estate, investments, and any dependents you may have.
What to Do Next?
Once you’ve been approved for a mortgage, the next step is to pay the down payment.
The minimum amount required is 5% of the mortgage amount, but it can go higher depending on how the lender will grade you. However, most financial advisors would tell you to put down 20% or more because if you put down less, you will be required to get a private mortgage insurance (PMI) which is an additional cost you can avoid making.
Plus, you would pay a bigger portion of the property with the down payment, so you would be left with lower monthly repayments as well.
Before signing that final agreement, make sure you’ve gone through all your options, both banks and mortgage brokers. Because the loan is a big one, the interest rate is as well, so the difference between two brokers or banks can be a few thousand dollars apart.
If needed, you can always hire a mortgage advisor to help guide you through the whole process and advise you on the best choices you can make to protect your financial stability and future.
In the end, getting a good deal for your mortgage will ensure that you will be able to live in your dream home peacefully, without having to stress over your finances. You will be able to plan out your financial future and your life, which is why getting educated about mortgages is the first and main thing you should be focused on.
We at Dominion Lending Centres are dedicated to giving you the most helpful mortgage advice and giving you the best mortgage service, no matter what your needs are – read more about Dominion Lending over here.
As specialized mortgage agents, you can be sure that we have the solution for you that will take away all of the stress and get the best mortgage product for you.
Get started today by applying online – it’s free and takes less than 90 seconds. Apply here at: https://www.goodadviceforabetterlife.ca/application/