How Your Mortgage Loan Works
Mortgages function like many other types of loans. Money is borrowed to complete your purchase, with interest charged on your principal – the amount you borrow. The mortgage is used to complete the purchase of your property, and payments are comprised of loan interest and repayment of principal.
Let’s explore the various components that make your mortgage work.
Down payments
The majority of mortgages in Canada are based on a 20% cash down payment, made up front once your purchase has gone through. An exception to the rule is a 5% down payment that is permitted for first-time homebuyers.
Keep in mind, higher down payments mean lower monthly mortgage payments. Capital 360 Mortgage recommends speaking with a reputable financial advisor who can help you set a budget, and start saving for your purchase.
Pre-approval
Getting a mortgage pre-approval can take a lot of the guesswork out of shopping for a new home. In this scenario, potential lenders take a look at your finances, current debt load, income, etc., to determine how much mortgage you can afford. Then, they will guarantee a mortgage rate for a fixed amount of time, giving you the time you need to find a home, and evaluate your decision.
A Capital 360 Mortgage Agent can help you start the pre-approval process. To qualify for a pre-approved mortgage loan, you will need:
- Official government issued ID
- Employment details and history
- Any additional income streams
- Banking information, including existing loans, debts and accounts
- A verified list of financial assets
- Amount and source of your down payment
- Proof of funds for closing costs (approx. 1.5%-4% of your purchase price)
Customizing Your Mortgage to Suit Your Needs
Your Capital 360 Mortgage Agent will help you create a mortgage plan that meets your specific needs and fits with your financial picture. When customizing a mortgage strategy, there are a number of strategic factors to consider.
Amortization period
A general rule of thumb is that the longer the amortization period, the lower your monthly payments will be. Your mortgage agent will help you determine how much you can comfortably afford.
Mortgage payment schedule
While payments are usually made monthly, depending on your financial and employment situation, you may also be eligible to make weekly or biweekly mortgage payments. Accelerated payments that help you pay down your principal faster may also be available – your mortgage agent will help explain all of the options to you in detail so that you can make the right choice for you.
Type of interest rate
Choosing between a fixed, or variable rate can also impact your monthly payments. Fixed rates usually offer higher rates, but come with a set payment that lasts the duration of your mortgage term.
On the other hand, variable rates come with lower rates but may fluctuate depending on market conditions. With a fixed variable rate, the amount of interest your mortgage payment covers varies with market forces but offers a maximum payment amount.
Mortgage term
The length of term you choose can also impact your monthly payments. Mortgage terms can vary from 6 months to 10 years, with 5 years being the most common.
Type of mortgage – open or closed
Finally, you can choose to go with either an open or closed mortgage. While open mortgages come with higher interest rates, they allow you to pay off part, or all of your mortgage at once without penalties.
Alternatively, a closed mortgage offers lower interest rates and allows pre-payments up to a certain percentage without penalties.
When it comes to customization of mortgages, the choices are endless. Which is why it’s always a great idea to speak to a mortgage agent about your options.