Mortgages and the Down payment
Have you been wondering how mortgages work? When it comes to buying a home we all have to think about how we’ll finance it. It’s a major purchase and one that is life changing, you’re becoming a homeowner, it’s exciting. First we should review how mortgages work.
There’s a lot that goes in to purchasing a home, you need to do a mortgage stress test. This test will determine what sort of mortgage you qualify for, we’ll discuss more of that later. We want to make sure that you also understand the two different types of mortgages as well, open and closed. We’ll start by discussing the down payment.
The Down payment
The down payment is just one part of the whole sale process, it’s a way of letting the mortgage lenders know that you, the buyer, are able to handle the financial sound. It also let’s the lender know that you’re able to make the monthly payments. It’s important for you to start saving for the downpayment well in advance of making an offer on a home.
When it comes to the first step that you’ll take in this process, after saving, will be to find a mortgage lender. What is a mortgage lender? They’re a bank or an organization that is willing to lend you the money you need to purchase your new home.
In Canada, there are a few lenders to choose from, for example, The Royal Bank of Canada, Scotia Bank, etc. In order to be able to get a loan you need to be eligible, this is determined by completing the pre-approval process. In this stage it’ll involve the mortgage stress test. We actually covered this in a previous blog. We’ll do a quick review of that here.
The Mortgage Stress Test
What is the mortgage stress test? To get more details please also check out a previous blog. To answer this question, in short, the stress test is designed to determine and see whether you qualify for a mortgage. Most lenders will require you to supply government ID, proof of address, employment information, employment history, credit history, credit score, and that you have an account with a Canadian bank.
The stress test will allow the lender to determine a budget and how much you’ll be able to afford. Which is very important when it comes to what price range you can look at when house hunting. It’s also important to know so that you can budget for each month, making sure that you can make your mortgage payments, along with other payments that go in to having a home. There are two types of mortgages and this test will also help determine which one might be best for you.
What are Open and Closed Mortgages?
Did you know that there are two types of mortgages? In Canada, when it comes to how mortgages work, all mortgages are either open or closed. Each one has different terms, and these terms will determine what’s allowed and what’s not. The terms also decide how often payments can be made and how much can be paid off. You can prepare choosing what type of mortgage you want, you’ll need to review you finical situation to do this.
Closed mortgages have lower interest rates, however, they have more payment penalties. The penalties will be outlined in the montage details and will state how much money can be paid for each payment. You can lowed the monthly payment in exchange for a longer amortization period.
Open mortgages have payment privileges at a higher interest rate. In this case your monthly payments don’t have a limit to what the specific amount can be. You can make lump sum payments if you choose. With an open montage you’re able to pay it off faster in many cases.
When you’re deciding what mortgage is best for you, you’ll need to ask yourself a few questions. Some of the questions you might want to ask yourself are; what is your financial situation, can you pay your mortgage off early, when do you plan on selling, do you plan on selling before the mortgage term is up, what mortgage rate will you be able to afford. These are just a few important questions you need to try and answer. The next step will be actually applying for a mortgage.
Applying for a Mortgage
Now you’re ready to apply for a mortgage loan, but how do you do that? When applying for a mortgage it can be pretty straight forward, and the current market is flexible. Because the market is flexible it means that it’s easier for homeowners, and new homeowners, to get a loan that will suit their needs. You’ll apply for your mortgage through the financial institution of your choice, we listed a few above. They’ll walk you through the process in greater detail.
If you want lower rates and more freedom with loans, you’ll need to compete the qualifying criteria and also prove that you are able to make the monthly payments, the stress test will help determine this. Then when you’re ready you can begin to look for the house of your dreams, this is the really fun part. I can’t want to help you along in this journey.
Contact Lori VanDinther and Team
Taking the step to look for your new home can be a big one for some, and I want to make sure that you have a wonderful experience. Myself and my team work hard to make sure that our clients are happy and in love with their new home.
You can contact me either by phone to email and I will be happy to answer any questions about how mortgages work, and any others you might have. If you’ve been wondering what your home is worth, you can use my What’s My Home Worth calculator. I’m looking forward to working with you soon!