Mortgage Information for Home Buyers
Noun: The charging of real (or personal) property by a debtor to a creditor as security for a debt (esp. one incurred by the purchase of the property), on the condition that it shall be returned on payment of the debt within a certain period.
Short Term Rates vs. Long Term Rates
The options for mortgages available can be very confusing for most mortgage shoppers. Terms for mortgages vary between variable and fixed rate, six-month terms to 10 year terms. Taking a variable or floating rate mortgage can have savings. Typically the shorter the term or guarantee of the rate, the lower the rate will be. This does not always happen, depending on the market place and the economy, but history has shown that short-term rates tend to be lower than long-term rates. The up side of variable rate is the strong potential for interest rate savings. The down side is the fact that you are accepting the interest rate risk without a guarantee. If you are considering a variable rate mortgage you need to look at your own risk tolerance, and your cash flow available to deal with potential increased payment. Considering projections of rates and where we see interest rates heading can also be important in this decision. Make sure you talk to an expert when you are making this decision.
Discharging your mortgage
Most people pay off the remaining balance of their mortgage with the proceeds from the sale of their home. If you have an open mortgage you can discharge your mortgage at any time without
penalty. However, if you have a closed mortgage you will have to pay a penalty. The penalty will vary and can be quite high. Your specific mortgage will have more details.
If your mortgage is portable you can take the mortgage with you to your new home purchase without penalty. The advantage here would be if the interest rate on your mortgage is lower than current rates, you will be able to keep paying a lower interest. However, if you require more money to purchase a home, you will have to get a new mortgage at the current rates, or some institutions will allow you to blend your current mortgage with a new mortgage.
Buyer Mortgage Assumption
If your mortgage allows it, the buyer can take over your mortgage. This is ideal if your interest rate is lower than the current rates.
Vendor Take Back Mortgage
Lending a potential buyer the money to purchase your home is an option used when a buyer may be having difficulty getting all the money to buy your home. This type of mortgage is often used to move a home in a slower market. This is an extremely complicated process and it is highly recommended that you discuss this option with a lawyer.
Talk to your existing mortgage lender about bridge financing. This is when your lender (the bank) agrees to lend you the amount of the mortgage for your new home, while you still cover the mortgage on your existing property if you have not yet sold it or the dates don’t line up.
Bi-weekly and Weekly Payments
Most mortgages have the option to allow payments to be made on a weekly or bi-weekly basis. This option may be desirable for two reasons. The first is it can save you money as you can expect to pay off your mortgage about four years sooner. This can save you dramatically over the life of your mortgage. The other reason why these options are so popular is that if your employer pays you on a weekly or bi-weekly basis, you can simplify your budgeting by making the payment line up with the way you are paid.
Making Extra Payments
Paying extra amounts on your mortgage can make a big interest saving over time. When you select a mortgage company, privilege payments options are something to look for. A 20% privilege payment will allow you to pay off up to $20,000 per year on a $100 000 mortgage. It is important that the privilege payment also be flexible to allow you to pay smaller payments on the mortgage and as often as you wish. An extra $1000 periodically paid on a mortgage can help you become mortgage free faster.
Reducing the CMHC Fees on Your Purchase
When you require a mortgage for more than 75% of the purchase price of a property, that mortgage must be insured by Canada Mortgage and Housing (CMHC) or GE Mortgage insurance. The premium charged by these company’s decreases as the down payment increases. When you finance your property at 95%, a premium of 2.75% is added to the mortgage. By increasing the down payment to 10% of the purchase price the premium can be reduced to 2.5%. If you can put down 20%*, you can avoid any additional insurance fee. Depending on your situation there are ways that you can structure this financing to avoid the CMHC or GE insurance premium.
Advantages of Bigger Down Payments
As mentioned above, when you put a 20%* down payment on your purchase you can avoid the CMHC premium. More importantly the larger the down payment, the lower the amount of interest you will pay over the life of your mortgage. It is important to note that it may not be wise to stretch yourself to increase your down payment and end up borrowing on credit cards or a line of credit at a higher rate.
*Based on 25 year amortization. Premiums charged on amortization over 25 years.
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