How Your Toronto Property Tax Dollars Are Being Spent…
If you are a homeowner in Toronto, then you must be well aware of that “little” bill that comes in your mail every year.
So you want to buy a house, but the idea of understanding mortgages makes you ill? Not to worry, I have covered the most important things you need to know about understanding mortgages in this article. So before heading to the first bank you see and asking to be approved for a mortgage, here are the key terminologies and options available to you. It may seem daunting at first, but these 4 key questions will help you jumpstart your mortgage research.
1. Should I go for a Conventional or High-Ratio Mortgage?
Conventional Mortgages: It’s a loan up to 80% (max) of the lending value of the property; meaning the home buyer has made a down payment of at least 20% of the purchase price or market value of the home.
High-Ratio Mortgage: A mortgage loan that is higher than 80% of the lending value of the property (up to a maximum of 95%). If your down payment is less than 20% of the purchase price, you’ll most likely need a high-ratio mortgage.
2. Should I select an Open or Closed Mortgage?
Closed Mortgages: You can pay the same amount each month for the entire term of the mortgage (with some flexibility to repay the principal through lump sum payments). Closed mortgages can be a good choice if you want a set payment schedule and aren’t planning on moving or refinancing before the end of the term.
Open Mortgage: The homeowner can make a lump sum payment at any time and can pay off the mortgage prior to maturity without penalty. An open mortgage can be a good choice if you’re planning to sell your home in the near future, or if you want the flexibility to make large lump sum payments. Keep in mind an open mortgage generally carries a higher interest rate than a closed one.
3. Fixed, Variable or Adjustable Interest Rates, which one should I choose?
Fixed Rate: Homeowner is locked-in for the entire term of the mortgage.
Variable Rate: The payments remain the same each month, but the interest rate fluctuates based on market conditions.
Adjustable Rate Mortgages: Both the interest rate AND the mortgage payments can vary and are also based on market conditions.
Selecting one is dependent on location, housing conditions and personal preference. If you feel comfortable with a set number each month then a fixed interest rate could be for you.
4. How should I set-up the payments and for how long?
There are three things to consider when creating a mortgage time line: term, amortization and payment schedule.
Term: The length of time that the interest rate and other conditions of your mortgage will be in effect (usually 6 Months to 10 years).
Amortization: The period of time (such as 20 or 25 years) over which your entire mortgage will be complete plaid off.
Payment Schedule: Outlines how frequently you will make payments on your mortgage – usually monthly, biweekly or weekly. Accelerated payments are also an option, which are available for weekly and bi-weekly payment schedules (generally equivalent to one extra monthly payment per year). The great thing about accelerated payments is that the homeowner is able to pay off his/her mortgage faster while decreasing the overall interest cost.
Talk to a mortgage specialist to find out which option is right for you. Understanding mortgages in one night isn’t always easy but we hope we gave you a great place to start.
