What to Know About Basic Canadian Home Mortgages

Posted by EdmontonRealEstate.ca Team on Wednesday, November 28th, 2018 at 11:24am.

Understanding How Home Mortgages WorkThe right mortgage for a Canadian homebuyer depends on their budget, future plans, and extenuating circumstances. While some people may choose their mortgage by picking the loan with the lowest interest rates, doing so may not be the best decision in the long run. Before visiting a lender, it helps if a buyer understands the logic behind mortgages and their available options.

For informational purposes only. Always consult with a licensed mortgage professional before proceeding with any real estate transaction.

Understanding the Theory Behind Edmonton Mortgage Loans

The process for mortgage acquisition in Edmonton nowadays will require home buyers to transact with a lending company or mortgage provider who will be doing all the verifications and other necessary documents needed for your loan approval. Once approved, you shall be given property ownership in exchange of monthly mortgages.

Home buyers will then make your monthly payments to the mortgage company that granted you the home loan, or it could also be that the company moved your account to another mortgage company. Basically, the money used to pay for your home ownership won’t actually come from the company that granted your loan. These companies usually just act as servicers between the buyer and the investor who actually produced the money needed.

A mortgage application is just among the countless applications that were passed on to any of the three major institutions we mentioned above. The servicers, or the mortgage company receives a monthly percentage from the lending investor for each loan that they have processed.

Since they were the ones who processed the buyer’s loan, and they will likewise be the ones who are going to follow up on your payments, lending investors are to pay them monthly, with the amount depending on how many borrowers they were able to get approval for. Their fees usually depend on certain conditions, but in most cases, servicers get about 3/8 of 1% or so. Some of these institutions have up to billions of dollars home loans. And if home buyers were to get 3/8 from 1% of a billion dollars, we can safely say that these mortgage brokers have way more than enough income.

As a matter of fact, mortgage servicing is what really brings in more money to lending companies. These services aim to get loans into their portfolios, and the more they have, the more profit they are going to make.

The entire mortgage system is designed in such a way that lenders receive additional funds so they could lend out more for their portfolio and eventually sell these to any of the three major lending investors. This will then allow them to earn more and more income each month, depending on the number of home loans they get.

Down Payments for the Home Mortgage

The ideal goal behind a down payment was for homeowners to put down at least 20% of the purchase price in cash. Even as home inflation continues to rise in many parts of the country, the standards remain the same for buyers of today. Because salaries haven't risen at the same steady pace as home prices, banks will use a variety of techniques to mitigate their financial risks. Homeowners who are unable to put down at least 20% in cash towards their mortgage are typically asked to pay an additional fee every month for Lenders Mortgage Insurance (LMI.) LMI is an insurance policy a lender takes out in case the buyer defaults.

Loan Amortization Formulas

Loan amortization refers to how a bank decides exactly how much a homeowner pays each month for their mortgage. It's based on the following factors:

  • Principal
  • Length of the Loan
  • Interest rates
  • Type of loan borrowed

These factors determine how much the borrower will pay each month for their mortgage. Though all four factors are important (especially the amount of the principal of the loan), the interest rate is probably the most important (and possibly variable) factor in a home mortgage. For example, if a buyer takes out a loan at a 5% interest rate, they'll be paying this interest on the principal of the loan for the complete length of the loan.

Because homeowners pay the most interest at the beginning of their mortgage and less over time, they need to be careful about the term length they choose (the principal paid goes up each month as the interest expense goes down). A 30-year loan will sound attractive because the payments are usually much more affordable, but it also means a homeowner will be paying more in interest costs over the course of three decades.

Fixed and Adjustable-Rate Mortgages

An adjustable-rate mortgage (ARM) will have loan interest rates that will vary as interest rates rise and fall, while a fixed rate mortgage stays the same regardless of fluctuations. An ARM will usually offer some of the lowest interest rates, but they may not always be the best choice. Interest rates change due to both federal stipulations and general lender practices.

For example, if rates continue to rise, a buyer could end up spending far more on interest than they would have had they had chosen the fixed-rate interest mortgage option. A variable Home Equity Line of Credit is similar to that of an ARM, usually used to make repairs on older homes.

What are the Common Financing Mistakes when Buying a Home in Edmonton?

As a home buyer, understanding the different mistakes you may make throughout the buying process can help you avoid these mistakes. There are plenty of financing mistakes you could make and you should understand. Here are some of the common things you should make sure you avoid.

Not Properly Budgeting or Budgeting at All

Setting a budget for a house is very important. You will need a budget as you go through this process. Without one, you may assume you can afford more house than you really can. This could leave you with a high mortgage payment or shopping for homes you cannot get approved for.

Not Dealing With Credit Issues

If you have less than perfect credit, one of the first things you should work on is handling any past credit issues. There are plenty of lenders that may work with you, but getting some of the past credit issues cleared up will make it much easier.

Thinking a Home is a Short-Term Investment

For many people, their home is the largest and longest investment they will make. It should never be treated like a short term investment. You don't want to buy a house for temporarily living. Instead, you should plan to stay in the home for at least 4 years or you should probably be renting instead of buying.

Forgetting Specific Costs

You cannot just look at the rent you pay now and compare it to the mortgage. Many additional costs will also be a part of the costs and you need to be prepared for these costs. Make sure you consider insurance, taxes, maintenance and the many other costs that can come with a new home.

These are some of the common financial mistakes home buyers make when they shop for a home. Make sure you are aware of these mistakes so that you can avoid them.

Additional Mortgage Tips

There are a few more things for buyers to keep in mind when loan shopping. For example, open mortgages are available for home buyers who want flexibility when it comes to either paying off their mortgage or discontinuing it early. While the interest rates are higher, the penalties are lower than that of a closed mortgage. Some buyers may also have to undergo a stress test before being approved for their loan. Essentially, lenders will test a buyer's ability to pay in the event that mortgage rates rise.

Finally, some home buyers may want to work with a mortgage broker over a traditional bank. Brokers may be able to fast-track mortgage applications and potentially find a buyer better terms than they'd find on their own.

There's a lot of nuance when it comes to choosing a home mortgage, and these tips only scratch the surface. For a Laurier Heights home buyer to understand their specific home mortgage, they'll first need to determine their price range (both now and in the future) before consulting with real estate professionals and reputable lenders to determine how they should best structure their home loan.

For informational purposes only. Always consult with a licensed mortgage professional before proceeding with any real estate transaction.

By Justin Havre

 

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