A mortgage is a loan secured by real property used in the purchase of a home. The key elements of a mortgage include the down payment, mortgage rate, amortization period, the term, payment frequency and closed versus open mortgages.
Here’s a breakdown of the six key elements of a mortgage:
A down payment is the lump sum amount of money you pay upfront to obtain your mortgage. It reduces the total loan amount and typically ranges from 5% to 25% of the asking price of the home but can be much more. When buying a home/property the total loan amount is equal to the asking price of the home less the down payment plus mortgage loan insurance if it applies. This mortgage loan insurance is required for high ratio mortgage loans which applies to mortgages with down payments that are less than 20%.
What is a mortgage rate? Quite simply it is the interest rate on your mortgage. There are typically two types of mortgages to choose from; a fixed rate mortgage and a variable rate mortgage. With fixed rate mortgage your payments are constant throughout the term of your mortgage. By contrast a variable rate mortgage is based on your financial institution’s prime rate plus or minus a set number of basis points. During the term of your mortgage if the prime rate changes so will your mortgage rate and the amount of the payment that goes towards the principal.
The amortization period of a mortgage is the length of time in which you will pay off your entire mortgage. The most common amortization period for a mortgage in Canada is 25 years. Extending your amortization period is one way to reduce the amount of your payments but results in an increase in the total amount of interest paid on your mortgage. In contrast, the shorter your amortization period is the faster you’ll pay off your mortgage and the less interest you will pay.
To see the full effect of differing amortization periods, use a mortgage payment calculator and look at an amortization schedule. An amortization schedule will show you how each of your payments reduces your loan balance, how much of your payment goes towards interest, and how much goes towards reducing your principal. This will help you understand what makes sense for your financial circumstances.
The term of a mortgage is the period of time that the loan is repaid and is typically anywhere between six months and five years although longer terms are available. The mortgage contract is based on the term and the end of the term in which the contact comes up for renewal. The borrower can then renew with his or her current lender based on the terms of the renewal, refinance with the current or new lender or switch to a new lender
The payment frequency is how often you make your mortgage payment. Typical payment frequencies are monthly, bi-weekly, and weekly. Some providers also offer accelerated payment options to pay off your mortgage faster. If you make more frequent payments, you’ll be able to pay off your mortgage sooner.
Closed Versus Open Mortgages:
In addition to variable or fixed rate mortgages, they can also be either closed or open. A closed mortgage is best if you don’t plan on paying off your mortgage in full in the short term. If, however, you want to pay off the mortgage before the specified term date, you’ll have to pay a penalty. If you agree to keep your mortgage for the full term, you’ll get a lower interest rate than in an open mortgage. With an open mortgage, you have the flexibility to pay off the mortgage at any time without a penalty. The cost of this increased flexibility is a higher mortgage rate. Since closed mortgage rates have a lower interest rate, you may be curious as to why anyone would choose to have an open mortgage. Individuals who select an open mortgage may expect to receive a large amount of money in the near future that may enable them to pay off their mortgage. This could be from an inheritance or from selling their home. If, however, you don’t expect to receive a lump sum of money anytime soon, a closed mortgage is better because you’ll receive a much lower interest rate.
Benefits of Using A Mortgage Agent:
To find the best mortgage you must compare and understand the different rates, terms and conditions from multiple lenders. Doing this on you own can be a daunting task in particular if you do not have previous financial services experience. Working with a licensed mortgage agent can help you better understand your options in search for a great mortgage. Mortgage Agents can serve as an intermediary between you and the borrowers and can pass their volume discounts with lenders. They have access to dozens of lenders and based on your feedback and their industry knowledge they find the right mortgage solutions to meet your needs. Typically, the services offer by a mortgage agent are FREE to borrowers as they are in most cases compensated by lenders.
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