First-Time Home Buyers: Mortgage 101

Are you thinking of purchasing your first home? Congratulations! The process of buying your first home and going through the mortgage process is an excited, crazy time. Don’t be concerned, a qualified mortgage professional will make it as painless as possible. Until you get set-up with a mortgage professional, here are some key terms you should know to make the process a little bit easier.

Amortization Period
The amortization period is the number of years it will take for you to completely pay off the mortgage. If your down payment is less than 20% then the maximum amortization period is 25 years. If your down payment is more than 20% then the absolute maximum is 35 years. Whatever length amortization period you choose remember that the longer you take to pay off the mortgage, the more interest you incur.

Appraised Value

So you go out and find the perfect home and agree on a price with the seller, but the cost doesn’t stop there. The lender may still require an accredited appraisal to verify the home’s value. If the appraisal comes in lower than the agreed upon price, then you will know you aren’t overpaying for the home. If the appraisal results in a price higher than the selling value, then you got a great deal! By going through the appraisal process you can ensure you are protected.

Closed and Open Mortgages
A closed mortgage simply means that you will be subject to a penalty if you decide to pay it out before the term is up. An open mortgage on the other hand, allows you to pay it off or pay it out in full at any time with no penalty.

Closing Costs
After you settle on the price of the home, closing costs come into play to cover indirect costs, including legal fees, property tax holds, and title insurance, to name a few. These costs are the reason that lenders and insurance companies require an additional 1.5% of the purchase price.

Down Payment
The down payment is the percentage you put down on your home purchase to secure the mortgage. The minimum down payment permitted is 5% of the purchase price. The down payment can be in the form of RRSP’s, cheque, savings, mutual funds, gifts, and even borrowed funds. If the funds come from a gift, yourself and the generous person must sign a letter to state that no repayment is expected. If the funds are borrowed from a line of credit, loan, or credit card then the repayment amount is calculated with your overall debts to prevent you from being stretched too thin.

Fixed Rate Mortgage
Over two thirds of people will choose a fixed rate for their mortgage. Knowing the rate will not change allows mortgagees the security of having the same payment each month. A fixed rate is renegotiable at the time of renewal as well.

Mortgage Insurance
Mortgage insurance is required for all mortgage holders who have less than 20% as their down payment. This insurance is in place in the event that you default on a payment and is based on a set percentage that is added to your mortgage. The beauty of mortgage insurance is that it allows you to purchase a home before you have saved 20% for your down payment!

Mortgage Term
A mortgage term is the amount of time you agree to pay off your mortgage in and stay with your mortgage lender. These come in lengths anywhere from 6 months to 10 years. At the end of each term you are able to negotiate with your lender for a new term or switch to a new lender. It is important to do some research before you sign for any renewal term as you could end up saving thousands of dollars!

Pre-Approval
As you are asking a lender for a substantial amount of money they want to see ample proof that you will be able to pay it back. Your pre-approval consists of things like bank record, status of other debt, employment verification, and credit history, to name a few. The lender will review all the paperwork to ensure you are a good risk, and then grant you the pre-approval.

Pre-Qualification
Pre-qualification is the very first step in the mortgage process. The pre-qualification lets you know how much money you may qualify for based on existing debt, income, and assets. The number given to you does in no way guarantee that you will be granted that amount though.

Variable Rate Mortgage
A mortgage with a variable rate means that the interest rate will fluctuate according to the lending rate set forth by the Bank of Canada. Upon mortgage renewal you are able to switch to a fixed rate if you’re concerned about potential increases.

Well, that concludes our vocabulary lesson for all you first-time home buyers. You have now successfully learned or revived your knowledge of basic mortgage matters and are ready to get started on the road to your first home!