MORTGAGE TYPES
Conventional and High Ratio Mortgages
To qualify for a conventional mortgage, you simply have to have a 20% down payment of the purchase price, with the mortgage not exceeding 80% of the appraised value.
If your down payment is less than 20%, then you qualify for a high-ratio mortgage. This type of mortgage requires loan insurance, which can cost an additional 0.5% to 3.75% of the mortgage amount. With this type of mortgage, you could also be limited to a maximum house price.
Second Mortgage
Of course, if you cannot add on to your mortgage, you may consider a second mortgage. Each mortgage uses your home as security and gives the mortgagee the right to take your home if you default on your loan. The first mortgagee gets paid first in cases of default and has the best chance of recovering all of its money. So it only goes to figure that subsequent mortgages usually come with a higher interest rate.
MORTGAGE FEATURES
Every lending institution is different, and each will have their own customizable mortgage options. When you’re hunting for a lender and a home, see how the following features could be beneficial to you.
Prepayment
This is a wonderful option if you receive regular bonuses or if your income fluctuates throughout the year. With a pre-payment privilege, you have the right to make payments toward the principal portion of your mortgage over and above the monthly payments. A mortgage with a pre-payment option is closed. An open mortgage means you can pay the entire principal sum without notice of bonus.
Portability
If you still have time remaining on that fantastic loan you negotiated, portability is one option you’ll want to discuss with your lender. Quite simply, it means transferring the balance of your current mortgage at the existing rates and with the existing terms and conditions, to your new home.
Assumability
Let’s say that the vendor has negotiated a dynamite mortgage. With an assumable mortgage you, the purchaser, simply assume the obligations of the mortgage. This is a wonderful feature especially if the terms are more favourable than the existing market conditions would allow. Remember, when it is time for you to sell, you may still be liable for any mortgage you allow the buyer to assume. This means if the buyer stops making payments, you could be accountable for the payments. Be sure to have the subsequent buyer approved for the assumption of the payments, thereby avoiding this potential land mine.
Expandability
If you need additional funds down the road, will your mortgage terms allow you to increase the principal amount? Usually, your new rate will be a blended amount of the initial mortgage rate and the prevailing rates. It’s a great option to discuss with your lender if you foresee large expenses in your future like renovation or education costs.
MORTGAGE TERMS AND FEES
Mortgage Term
Over the course of your amortization period, you may have many different mortgages. The term is simply the length of time that interest rates, payment schedules and obligations to the lender exist. When the term comes to a close, you will have the option to renew your mortgage at your current or new lending institution. You can also put a lump sum toward the principal without restriction, or pay off your entire mortgage without penalty. If you wish to change the structure of your agreement during the term you may have to pay a substantial fee to the lender.
Choosing Security or Flexibility
Mortgages are available with closed, open and convertible options, with fixed or variable rates. The options you choose will reflect your beliefs about the market — is it going up or down? — and your short-term goals and desire for long-term security.
Amortization
This is the amount of time over which the entire debt will be repaid. Most mortgages are amortized over 15, 20, or 25-year periods. The longer the amortization, the lower your scheduled mortgage payments, but the more interest you will pay in the long run.
Open Mortgage
This type of mortgage offers a great deal of flexibility, as it can be repaid in part or full at any time without penalty. This is a great mortgage if you believe interest rates are moving down or if you plan to move in the near future. The term may be limited to six months or one year.
Closed Mortgage
Here the interest rate is fixed for the full term of the mortgage, and you will have to pay a penalty to change the agreement conditions, or sell the house and discharge the mortgage. This type of mortgage is ideal for buyers who suspect that interest rates will rise and who are not planning to move in the near future. This type of mortgage is usually available in a wide variety of terms.
Convertible Mortgage
With this mortgage, you’ll enjoy the same peace of mind as a closed mortgage, plus the flexibility to convert to a longer closed mortgage at any time without penalty. If you think rates will drop, this will allow you to wait until you feel they have hit bottom, or if rates rise, you can lock in.
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