Understanding Mortgages - Everything a First Time Homebuyer Should Know

One of the first steps in buying a new home is to take a realistic look at what you can afford and how you are going to pay for it. If you are like most people, you will probably have to finance your home purchase with a mortgage loan.

What is a mortgage?
A mortgage is a loan that uses the home you buy as security. This loan is registered as a legal document against the title of your property. Here’s a quick overview of some of the most common aspects of a mortgage that you need to understand.

  • The principal is the amount of the loan, or the cash actually borrowed.
  • The interest is the amount the lender charges for the use of funds, or principal. Interest rates vary according to many factors, including terms and conditions of the mortgage. Mortgage payments are applied toward both principal and interest.
  • The amortization period is the actual number of years that it will take to repay the entire mortgage loan in full. This normally ranges from 15 to 25 years.
  • The term is the length of time for which a mortgage agreement exists between you and your lender. Typically, terms range between six months and seven years.
  • The maturity date marks the end of the term, when you can either repay the balance of the principal or renegotiate the mortgage at then current interest rates.
  • Options let you tailor the mortgage to fit your personal needs and circumstances. Open or closed mortgages, pre-payment options, fixed or variable rates or portable mortgages are just a few of the available options.

Types of Mortgages 
There are two basic types of mortgages:

  • Conventional Mortgage: The loan amount does not exceed 75% of the property value, defined as the lesser of the purchase price or the appraised value.
  • High-ratio Mortgage or National Housing Act mortgage: The amount is more than 80% of the property value (up to 95%). By law, a high-ratio mortgage must be insured against borrower default. The borrower pays a mortgage insurance premium (a percentage of the total loan amount) which can be added to the mortgage loan or paid in a lump sum in advance. The borrower must also pay an insurance application fee. 

(Source: Canadian Home Builder’s Association)

For all your mortgage needs call 204-954-7620 today!