Purchasing a home is one of the most significant financial decisions you will ever make.
This can make it an exciting but nerve-wracking experience.
While a mortgage is a big deal, it can be easier to manage with a thorough understanding of the mortgage process. So let's go through all the things you will need to know when getting a mortgage!
To get started, you need to find a mortgage that you qualify for.
Your ability to qualify for a mortgage depends on several factors:
To start, you need to assess your creditworthiness. Canadians are entitled to a free credit report from the two major credit bureaus:
You can ask these bureaus for your free credit report online or by phone.
Your credit report will detail all of your credit transactions. If you are wondering why your credit score is what it is, your credit report will provide an explanation.
When you know your creditworthiness, you can move on.
Mortgage calculators are online tools that provide rough estimations of what your mortgage will be like.
You simply provide a few inputs, and they provide you with the deals you qualify for.
Mortgage calculators are offered by various types of lenders and loan aggregators.
Most mortgage calculators process the surface-level aspects that go into a mortgage application process. These factors include:
A mortgage calculator is meant to help you quickly glance at mortgage options that you likely qualify for.
When you know which mortgage you want and what you qualify for, you can apply for pre-approval.
The mortgage preapproval process includes several steps on the part of the lender. They will view your credit score and report and other qualifications. Then, they will provide you with a few things:
If you accept the conditions they sent, you can make a formal mortgage application. During that process, the interest rate you locked in will remain unchanged for up to 120 days before closing and purchasing a home.
A formal mortgage application will include a hard pull on your credit score. This will cause a slight, temporary drop in your credit score.
You will need to make a down payment before the mortgage process can start. Down payments are 20% of the mortgage’s balance in most cases. For non-conventional mortgages, exact down payments will vary.
You will pay this portion of your new home’s cost upfront, and the mortgage lender will cover the rest.
Typical mortgage repayment terms last 25 years or longer.
Some short-term mortgages have repayment terms of 5 years or less. On the other end of the spectrum, terms go longer than 30 years.
The old maximum repayment term lasted 40 years, but the 40-year mortgage was eliminated in 2008 in Canada. Under current mortgage regulations, you can still get a 35-year amortization period.
There are several mortgage types. This can also depend on what country you live in.
The information we’ve gone over so far is fairly universal. However, factors such as repayment periods can vary dramatically depending on the type of mortgage you choose. To complete the picture, it’s necessary to consider how different mortgage types affect your terms.
Conventional/traditional mortgages are essentially your default option.
These mortgages come with fixed interest rates and a set repayment schedule. They require a 20% down payment.
An open mortgage adds some flexibility to the repayment process.
You can pay off a larger part of your debt at any given time. You can even opt to pay it all back in full if you have the money. There are no early repayment penalties with an open mortgage. Term lengths vary and interest rates are comparable to other (closed) mortgages.
These mortgages are consistent.
If you’re looking for stability, you can take a closed mortgage. Their defining characteristic is a single interest rate that is locked in for the duration of the amortization period. Eg. You can lock in a good interest rate for a specific period of time, protecting you from rising inflation rates.
Variable-rate mortgages start with an interest rate calculated by your lender.
Your repayments still include interest and principal and remain consistent. Where they differ is in the fact that if market rates change, the interest rate of your mortgage will be adjusted accordingly.
This can go either way for you. If interest rates drop, your payments should remain consistent, with a greater portion going towards repaying the mortgage’s principal
Capped rate mortgages are the same as variable-rate mortgages, except they come with a maximum (capped) rate.
This way, you can benefit from readjusted lower interest rates, but if interest rates go up, you know the maximum rate you’ll need to pay.
Armed with a little bit of knowledge, getting a mortgage will be a lot easier!
Know what questions to ask and do your research up front. Compare banks and interest rates. Knowing what is coming should make the process much easier for you!
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