Arranging a mortgage
Now is a great time to consider buying a home. Interest rates are very attractive and there is a wide choice of homes available to suit various budgets. Still, it’s most likely you will have to deal with financing and this will mean taking on a mortgage.
What is a Mortgage?
A mortgage in a nutshell is a loan to purchase a piece of propety or dwelling. It consists of two main parts: principal and interest. Principal is the actual amount borrowed. Interest is the fee you are charged for borrowing from the lender.
Things that you'll need to decide on are the amortization period (the length of time it will take to completely pay off the mortgage) and the term, or length of time each mortgage agreement guarantees said interest rate.
Before you go to a financial institution or mortgage broker, keep in mind that there are many mortgage options available. Shop around for the best rates and the best terms. Negotiate. Everyone wants your business, but it's up to you to look after your interests. Of course, the key thing to remember is to negotiate a mortgage that fits into your lifestyle, and doesn't take over your life! Your mortgage broker can help guide you through this process and supply you with information.
Amount of the Mortgage
With lower interest rates, you may qualify for a larger mortgage because your monthly payments will be lower. But always keep in mind that the larger your mortgage, the more interest you'll pay in the long run. That simply means your house will cost more. Also, what if interest rates rise? Will you still be able to carry the payments comfortably?
Before considering any mortgage, consider your down payment. If you're a qualified home buyer, you can purchase a house with a minimum 5% down payment. On a $200,000 home that would be an $10,000 down payment, leaving you with a $190,000 mortgage. Assuming you negotiate an interest rate of 8% for your mortgage, you're monthly payment for principal's interest would be $1450. Now let's say you decide o wait until you save another $10,000 before you buy because you think the bigger down payment will lower your monthly payments. At 8%, putting $10,000 more down on your house will only save you $77 per month, you might be better off saving $10,000 for a rainy day or a vacation or that hot tub you've been dreaming about. With today's interest rates, it just doesn't make sense to tie up your cash to save $77. You would be better off putting that extra money to work for you in another investment with a higher rate of return.
Conventional and High Ratio Mortgages
In order to be qualified for a conventional mortgage, you will need to put down 25% of the purchase price of the property as a down payment. This means that the mortgage can not exceed 75% of the appraised value. If the down payment is less than 25%, then you qualify for a high-ratio mortgage. This type of mortgage requires loan insurance, which can cost an additional 0.5% to 4% of the total amounf of the mortgage. A high-ratio mortgage also limits the maximum price of the house based on what you qualify for (based on income).
Pre-Approved Loans - Obtaining a Pre-Approved Mortgage
Why go house hunting only to find that you don't qualify for a mortgage on the dream home you've found? Having a pre-approved mortgage will give you the confidence of knowing exactly what you can spend on a home before you start looking. You will also be protected against interest-rate increases while you look for your new home.
Once you've done your homework and shopped for the best rate, meet with the loans officer to arrange a pre-approved mortgage and discuss the features you're looking for to tailor payments to your needs. It could take a few days, but give your lending institution about two weeks. It will eliminate potential headaches down the road.
Creating a Mortgage Strategy
Interest rate alone does not guarantee the "best" mortgage. There are several important features to look for within your mortgage product to ensure that you have the choice and value to pay down your mortgage debt quickly, save on interest costs and ensure you have the flexibility you require when you make a housing change.
Figure out how much of the principal can you repay in a single year. You should make sure that you have some form of prepayment clause in your mortgage that will allow you to pay down your mortgage with a lump sum, or an extra payment, without penalty. Doing these lump-sum payments every year will dramatically reduce your mortgage, and if you do the maximum amount you could have your property paid off in less than 10 years.