First Time Home Buyers

Mortgage Basics for First time Buyers

Mortgage payments are made up of principal (the amount borrowed) and interest (your cost to borrow the money).

The best plan for any type of mortgage is to minimize the amount of interest you pay.  Lenders offer several ways for you to do this:

1. A larger down payment - Putting down more money means your home ultimately costs less because a smaller mortgage means less interest.
2. A shorter amortization – Shortening the period over which a loan is repaid.
3. A weekly or bi-weekly payment schedule, instead of monthly.  This accelerated schedule can allow you to save money because you are making extra payments per year.
4. Additional lump sum payments.  Making additional lump sum payments reduces your principal and interest payments.

Mortgage Interest Rate

Interest rate is the cost of borrowing money and is paid to the lender.  Mortgage rates are either fixed or variable. 

A fixed rate is locked in so that it will not rise for the term of the mortgage.

A variable rate will fluctuate.  The rate is set each month by the lender, based on the prevailing market rates.  Your monthly payment is fixed to be the same each month for the term of the loan, but the percentage of each payment that goes towards the interest, and the percentage that pays down the principal, changes.

Mortgage Term

The term of a mortgage is the length of time that certain factors, such as the interest rate you pay, are set at a negotiated level.  Terms can last anywhere from 6 months to 10 years.  At the end of the term you either pay off your mortgage or renew it, possibly renegotiating its terms and conditions.

Amortization

This is the amount of time over which the entire debt will be repaid.  Most mortgages are amortized over 25 or 30 year periods.  The longer the amortization, the lower your scheduled mortgage payments, but the more interest you pay over the long run.

Open Mortgage

An open mortgage means you can repay the loan, in part or in full, at any time without penalty. Interest rates are usually higher on this type of loan.

An open mortgage can be a good choice if you plan to sell your home in the near future.  Most lenders will allow you to convert to a closed mortgage at any time.

Closed Mortgage

A closed mortgage usually offers the lowest interest rate available.  Closed mortgages are not as flexible as open mortgages and there are often penalties or restrictive conditions attached to prepayments or additional lump sum payments.

Mortgage Approval Process

A mortgage approval should take only a few days, but it’s best to allow up to 2 weeks.  During this process, the lender will do a credit check and verify the other information you have provided to us in your application.  In addition, an appraisal of the value of your home or property may be required.  Also, if required, a request for mortgage loan insurance is submitted to CMHC or a private insurer.  The lender then approves or rejects your mortgage loan.

Mortgage Pre-approval

Getting a pre-approval is very common in today’s market.  With a pre-approval, you are receiving confirmation that your lender approves the amount of your mortgage.  Once your pre-approval has been decided, you are given a written/verbal confirmation for a fixed period of time.  It allows you to hold the current interest rate for as long as 365 days in some cases.  A pre-approval gives you a head start on house hunting, but your final approval is still subject to a review of the property and your financial situation at the time of offer.