What is mortgage?

Mortgage is a loan from the bank.  In most cases, you need to sign a mortgage agreement with the lender. In this contract, they agree to provide funds and you promise to repay it at a certain interest rate within a fixed period of time.  The term of the mortgage can be short (1-5 years), medium (more than 5 years) or long (land).  Once you have finished paying back your debt in full and on time, then your mortgage comes to an end and you own all that belongs to that property.

Different types of mortgages?

There are many different types of mortgages in Canada:

  • Closed,
  • Open or
  • Rate mortgages.

The first two mentioned types actually come in the same mortgage, but there is one situation in which you can use it.

Open mortgage allows you to change its terms or conditions at any time and without any additional fees. Some banks even allow changes in payment amounts and interest rates.  You need to consult with your lender about what kind of options are available for open mortgages before signing a contract with them.

Closed mortgages require full repayment over a predetermined period (10, 15 years).  If you refinance such debts, it must be done according to current terms and not under the old ones (with lower interest rate).

The main difference between closed and open mortgages – flexibility during repayment process.  In all other cases, both types of mortgages are the same.

Rate mortgage allows you to change the interest rate at any time, but not when it comes to repayment period or payment amount.  You need to know that refinancing mortgage from a lender has its own special conditions and fees, so you will have a direct impact on your budget in the future.

Is there a mortgage with no money down?  Mortgage without a down payment?

In Canada, there is no such thing as a mortgage without a down payment.  All loans must be secured by some property. In fact, most people use their homes for collateral when they apply for credit from banks and other lenders, which ensures that if they fail to repay this debt then the bank can take their home.

What is mortgage insurance?

Mortgage insurance is a type of private insurance that guarantees the lender, which you get a loan to buy real estate, payment in case of default on your part.  It is mandatory for all mortgages through the bank and credit unions with less than 20% down payment (this includes CMHC-insured mortgages).  The borrower can use different ways to build such an insurance: he can pay the premium himself every month or hire a third party who will do it for him. Note that mortgage life insurance does not protect lenders from defaults – it only pays off the mortgage if the borrower dies before fully repaid his debt.

Who needs mortgage in Canada

Almost everyone gets a mortgage to buy a home.  But it does not mean that everyone can get one if they need or want it.  You must be at least 18 years old, have stable work and regular income, be free of debts (student loans, credit cards), etc.

What is the maximum mortgage that I can apply for?

Since you will use your house as collateral, then this loan amount should not exceed 80% of what you are buying.  For example, if you do not have enough money to pay for the entire house outright, so you borrowed $100 000 against real estate. Next step – calculate how much equity or down payment – 20%. Equity in this case = $20 000. And now we know that our mortgage can not be more than $20 000 plus 80% of the value of our home.

In other words, if you bought a house for $200 000, the maximum mortgage that you can take is $220 000.  If your debt exceeds this amount, then you must use another collateral or another way to finance it.

What are balloon payments?

Balloon payment – a large final payment on a loan that must be paid before maturity (fall due).  This type of credit is becoming increasingly popular because it gives borrowers the opportunity to save up money and make additional payments from time to time, thus reducing their monthly mortgage debt. However, one should note that often there are high interest rates associated with such loans. In some cases, a balloon payment can be very high.  You should also know that if you miss this large repayment, you will have to pay the entire debt immediately.

How do I get a mortgage?

In order to obtain a mortgage for the purchase of property in Canada, you must first determine how much money is needed and what type of loan can provide it.  Then find a lender who offers the most advantageous conditions depending on your needs and preferences.  You should know all the details about the initial fees and monthly payments and what types of refinancing they offer (if necessary).

Finally, submit an application providing relevant information (income, employment history) and wait for approval or cancel your request for credit with explanation.  The next step would be to sign a mortgage contract and make the initial payment (the amount of which will depend on the specific conditions of your mortgage). After this, you will begin to repay the debt, while monthly installments should arrive at the lender’s bank account every month by the due date.

What are future payments?

Payment schedule – an important document that outlines all recurring obligations arising from credit relationships with borrowers.  It includes information about interest rates, fees, repayment periods and other credit conditions. This document also contains information about other significant aspects of your loan agreement such as early repayment terms or refinancing procedures.

What are bi-weekly payments?

Bi-weekly payment – an option where you pay half of your prescribed monthly installment every two weeks instead of one lump sum at the end of each month.  This way you will repay the debt faster, which often results in lower interest costs and smaller total payments over time. Bi-weekly payment option can be used for all types of loans: mortgages, auto loans and personal loans.

What is a mortgage loan?

Mortgage loan – a specific type of consumer credit that helps purchase or repair residential property (residence). Thanks to it, borrowers obtain funds that they use to buy homes or other real estate.  Also one may obtain such a credit for any business purpose like purchasing equipment (trucking), company expansion (buying another business etc., as well as for the purpose of any type of development.  By signing a mortgage contract, borrowers pledge their real estate property to the bank as collateral and become personally responsible for repayment of the credit.

What is an amortization schedule?

Amortization schedule – a tool that shows how much you pay each time you repay your home loan.  It is usually created by the lender and includes information about interest rates, payments, total debt owed and number of payments remaining until maturity. Amortization schedule does not include fees added during the processing of the credit agreement or other one-time charges associated with obtaining it. This information can be found in section where you sign mortgage contract “Additional rules” or something like that.

How are ARM rates calculated?

ARM rates – abbreviation for adjustable rate mortgages. This type of loans is used to finance the purchase or construction of residential property (house, condo etc.).  It may be either bilateral (loan with an initial period during which interest rate does not change) or unilateral (interest rates can fluctuate after a specific date). The borrower pays only the interest part on his loan every month until all credit is repaid. When that happens, he receives full amount of money + accrued interests. With ARM loans, borrowers often pay significantly less than they would if they took out a conventional mortgage for exactly same properties and period of time.

What are closed-end loans?

Closed-end loans – types of credit where you receive a specific amount of money and have to pay it back with interest. Also there are no other regular installments included in the agreement, just the one-time payment at the end of agreed term.

What is a lender’s mortgage insurance?

Lender’s mortgage insurance – an insurance policy that protects the loan provider against loss arising from borrower’s death or permanent disability.  Insurance premiums can be paid either by borrowers (lump sum) or lenders (monthly), depending on individual policies.

What is private mortgage insurance?

Private mortgage insurance – an additional type of homeowner’s liability coverage for mortgagors whose down payments make up less than 20% equity share in their house/property.  PMI protects the lender against any loss of fund should a mortgagor default on his mortgage loan.  In some cases, borrowers can obtain it as part of their home loan application process and pay the premiums as a part of monthly installments until they have acquired 20% equity share in their house/property.

What is the difference between amortization schedule and mortgage payment calculator?

Amortization schedules – a set of documents created by a lender that shows how much a borrower pays each time he repays his credit. This includes the information about interest rates, amounts borrowed, payments remaining until maturity etc., but not fees or expenses associated with obtaining the credit (e.g., broker’s fees) which are included in section where you sign contract “Additional rules”.  A mortgage payment calculator helps you find out how much money* you should pay each month to repay your mortgage within a given period of time.

What is a fixed-rate mortgage?

Fixed-rate mortgages – types of home loans where interest rates remain unchanged during the entire term of credit repayment. *You can use mortgage calculators to calculate what monthly payment and total interest you will pay for your next mortgage loan. This way, you can determine whether it’s worth waiting for lower rates or if it makes sense to sign now and take advantage of current low rates. A good idea would be to compare the information from at least couple different sources before making any decisions as some companies may offer more profitable services than others (e.g., lower interest rates or include other services in their package).

In canada, mortgage can be paid off before the term ends. In that case, the borrower receives a lump sum for remaining funds (less penalties) + accrued interests. There are many factors that may lead to this decision but it is usually made when house prices in market drop significantly and there is no appealing demand on homes currently available (especially if they’re located far from city center).  Part of money received after prepaying your mortgage can be used to buy new property or gain some profits through investing with private companies offering high-interest deals/accounts.

What are adjustable rate mortgages?

Adjustable rate mortgages – types of credit where lenders offer loans with initial period of fixed rate, after which the rates are allowed to fluctuate depending on changes in market conditions.  For instance, if initial fixed-rate period is 5 years, after that mortgage holders may expect their monthly installments to go up by 0.25%-0.5%, but down by 1% or more if interest rates drop**. A good idea would be to use mortgage calculator before signing any agreements with lenders offering adjustable rate mortgages as some of them will not allow refinancing during the second half of credit contract (e.g., when interest rates significantly decrease).

What are demand loans?

Demand loans – types of home loans where borrowers are free to repay credits on agreed terms at any given time without penalty or additional costs. On the other hand, if the borrower tries to repay outstanding loans with different lender (or receive sum of money after selling his house), he/she will have to pay charges for breakage of mortgage agreement.

What is mortgage term?

Mortgage term – initial period during which the borrower is required to regularly make installments for his approved mortgage loan. Period can vary significantly depending on the lender, geographical location and purpose of financing (e.g., buying property vs. refinancing). Basically, mortgage term ranges from 5 to 30 years but it is not uncommon that credits are designed for 40 or 50 years period.

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