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For homebuyers, figuring out the loan process can be a complex and stressful experience. It can feel like their entire financial history is under a microscope and one slip could cost them the home of their dreams. But all that stress can be avoided with a good mortgage.
So, what is a mortgage? A mortgage is a legal document that allows a buyer to get a loan for their next property, secured against the property itself. That means the lender – traditionally a bank – can claim the property in the event you cannot repay the loan. A mortgage represents a large commitment that for many, will take the next 15 to 30 years to repay. However, it is also one of the simplest and most realistic ways for most people to afford buying a home or investment property.
The Elements of a Mortgage
When a buyer signs onto a mortgage, they are typically committing to monthly payments that include four key elements. Each month, when they buyer makes their mortgage payment, the money will be divided between these four elements.
The principal is the initial amount of money borrowed to make the purchase of a property. This excludes any of the costs created by the remaining three elements.
Interest is the money paid for the privilege of having a loan. These are a percentage of the principal cost which is determined based on factors such as credit score, purchase price, loan term and more.
Many lenders include property taxes in their mortgage payments. The taxes are then held aside for the lender to pay on behalf of you when their tax bill is due.
Homeowners traditionally pay homeowners insurance thought their monthly mortgage payments, which are kept in a separate account by the lender until they payment is due – just like property taxes.
As well, if the down payment put onto a home is less than 20%, you are required to get mortgage insurance. This is included monthly regardless of whether you borrow from a private lender, or a government backed source.
Discover How To Apply For An Investment Property Mortgages With This Step By Step Guide
Types of Loans
Home loans can come from a variety of private and government sources such as private equity firms and national banks. These mortgages can come in a large variety of forms with a wide array of repayment options. Here are some of the most common types of loans.
Fixed Rate Mortgages
The most common type of mortgage people look for is a fixed rate loan. As the name suggests, the interest rate on this loan is fixed for the duration of the loan. This means regardless of whether interest rates rise (or fall) the buyer will pay the same amount each month for their mortgage.
These loans typically come with a higher interest rate overall but avoid the potential rising interest rates that impact a variable rate mortgage.
Variable Rate Mortgages
Unlike a fixed rate mortgage, a variable rate mortgage changes over time. This means if key interest rates spike, buyers may find themselves paying higher overall payments for longer periods of time. However, if the rates were to drop the buyer would instead reap the benefit of reduced payments each month.
These loans typically come with lower initial interest rates but face the risk of paying more interest overall in the event of a rate hike.
As well, at the end of your term when you go to renew your mortgage you have the option to convert your variable rate mortgage into a fixed rate mortgage.
When applying for a mortgage, you will almost always be required to have a down payment of at least 5% of the purchase price of the home. However, it is recommended you aim to put at least 20% down if possible.
The minimum amount required for a down payment is 5% for the first $500,000 in property value and 10% for any value exceeding the initial $500,000.
The amount you should put down will depend on factors such as:
- Your Age
- Your Marital Status
- You Credit Health
- How much you have been able to save
- The purchase price of the property
- Any Major Debts
Regardless of how much you have saved, it is important to find a lender and property that can work with your budget instead of over-extending your finances and entering a mortgage you will not be able to pay.
How Much Do You Qualify For?
Before you go shopping for your next home or investment property, it is crucial to know exactly how much you can afford to repay. While there are countless investment calculators online that are available, the best method to figure out the size of the loan you can qualify for, is a pre-approval.
At LendCity, the pre-approval process is made simple and stress-free to ger you shopping as quickly as possible. During this process, lenders will look at your debt-to-income ratios and use those as a benchmark to determine what you can afford. The process looks like this:
- First, you go to LendCity.ca and fill out the online application and consent form with as much detail as possible.
- Your file then gets reviewed, and your broker will tell you which documents you need to provide. This can include ID, tax documents, NOAs, job letters, paystubs, etc. Essentially, the lenders will require proof of any financial information you put onto the application.
- Once your documents are submitted, your application is processed, and you are matched with a lender who best suits your specific situation.
- Then, you are informed of the total amount you have been pre-approved for on your application.
It is important to remember that a pre-approval is usually good for up to 90 days, meaning even if you are not quite ready to buy a home, you can use a pre-approval to secure a lower interest rate in advance to avoid any rate hikes that may occur over the next 90 days.
To get the mortgage process started, or if you have any further questions, please visit LendCity.ca