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. 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 proviso is that high-ratio mortgages
must be insured, and the cost, from one to three percent of the
mortgage
amount, falls to you.
'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.
Ontario
Real Estate Association
Commercial
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