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. Mortgage 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 provision is that high-ratio mortgages must
be insured.
'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.
