UNDERSTANDING MORTGAGE BASICS: WHAT EVERY HOMEBUYER SHOULD KNOW

Purchasing a home is one of the most significant financial decisions you’ll ever make, and for most people, it involves obtaining a mortgage. At Rocky’s Mortgages, we’re dedicated to helping you complete this complex process quickly. Whether you're a first-time buyer or looking to refinance, understanding the fundamentals of mortgages can empower you to make smarter decisions and possibly save you thousands of dollars over the life of your loan. Here’s everything you need to know about mortgages as you step into homeownership.

What is a Mortgage?

Simply put, a mortgage is a loan used to purchase or maintain a home, land, or other real estate types. The borrower agrees to repay the loan over a set period, typically 25 or 30 years, along with interest. The property itself serves as collateral for the loan, which means if the borrower fails to make payments, the lender can foreclose on the property to recoup their investment.

Key Components of a Mortgage

Principal

The principal is the amount of money you borrow to purchase your home. It’s the base amount you will need to repay, excluding interest. Over the life of the mortgage, part of your monthly payments will go towards reducing the principal, while the rest covers interest and other charges.

Interest

Interest is the cost you pay to the lender for borrowing the money. It is usually expressed as an annual percentage rate (APR). The interest rate can be either fixed or variable. A fixed-rate mortgage keeps the same interest rate throughout the loan term, stabilizing your monthly payments. A variable-rate mortgage, however, can change based on the market conditions, which might lower or increase your monthly payments accordingly.

Down Payment

The down payment is the initial upfront portion of the total purchase price paid by the buyer. Generally, it ranges from 5% to 20% of the purchase price. Larger down payments can help reduce the loan's interest rate or eliminate the need for Mortgage Insurance, which we'll discuss shortly.

Term

A mortgage term refers to the length of time your mortgage contract is in effect. This includes everything your mortgage contract outlines, including interest rate. Terms can range from a few months to five years or longer.

Amortization

Amortization is the schedule by which a loan’s balance decreases over time. In the early years of a mortgage, payments are primarily applied toward the interest. Over time, a larger portion of your payments will go toward paying the principal. Amortization periods can be anywhere from 1 year to 40 years. Typical Canadian Amortization periods are 25 or 30 years.

Types of Mortgages

There are several types of mortgages available to suit different financial situations and preferences:

Fixed-Rate Mortgages

This is the most traditional form of mortgage, offering a constant interest rate and monthly payments that never change. If you prefer predictability and stability, this might be the right choice.

Adjustable-Rate Mortgages (ARMs)

ARMs or Variable Rate Mortgages(VRMs) are as it sounds. The interest rate is adjusted based on your contract. Typically, when the Prime Interest Rates change the rate of interest on your mortgage changes in line. The rate can adjust up or down and has more risk associated with it as the rate is unknown. They can be beneficial in a declining rate environment, or if you need short-term financing and do not want to lock into a longer-term fixed plan.

Mortgage Insurance -Insured Loans

Mortgage Insurance allows you to buy your home with less than a 20% downpayment. The insurance is offered by various organizations, including Canada Mortgage and Housing Corporation(CMHC), which is a government national housing agency, Sagen and Canada Guaranty, which are private organizations.

The cost to insure your mortgage varies depending on the amount of down payment you can afford. The lower the down payment the greater the cost of insurance.

Conventional Mortgage

A conventional mortgage requires a down payment of at least 20% and is offered on either a fixed or variable interest rate basis. Conventional mortgages have the lowest carrying costs because they do not have to be insured against default.

Additional Costs to Consider

When budgeting for a home, it’s essential to consider all potential costs:

Closing Costs

These are fees and expenses you pay to finalize your mortgage, including lending and borrowing fees, home inspections, appraisals, and legal fees, typically ranging from 2% to 5% of the loan amount.

Property Taxes

Local governments charge property taxes, which vary depending on where you live. This cost is often included in your monthly mortgage payment and paid by your lender.

Homeowners Insurance

Lenders require this insurance to cover potential damage to your property. Like property taxes, these premiums are often included in your monthly payments.

As you embark on your home-buying journey, take the time to understand all aspects of the mortgage process. Educating yourself will help you choose the best mortgage for your long-term financial goals. At Rocky’s Mortgages, we are here to guide you every step of the way with expert advice tailored to your personal needs.

Ready to learn more about how you can manage the mortgage process? Visit our website or contact us today for personalized assistance and begin your path to homeownership with confidence.

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To learn more about the services we offer, email at michael.rothfeld@adamasfinancial.ca or call at (416) 456 8318 or (705) 994 3300.