Understanding Mortgages – What is a Mortgage?
When a person purchases a property in Canada they will most often take out a mortgage. This means that a buyer will borrow money, a mortgage loan, and use the property as first time buyers collateral. The buyer will contact a mortgage Broker or Agent who is employed by a mortgage Brokerage. A mortgage Broker or Agent will find a lender ready to lend the mortgage loan to the buyer.
The mortgage lender of the mortgage loan is often an institution such as a bank, credit union, trust company, caisse populaire, finance company, insurance company or pension check fund. Private individuals occasionally lend money to borrowers for Mortgages. The mortgage lender of a mortgage will receive monthly interest payments and will keep a lien on the property as security that the loan will be refunded. The borrower will get the mortgage loan and use the money to purchase the property and receive ownership legal rights to the property. When the mortgage is paid in full, the lien is removed. If the borrower doesn’t repay the mortgage the mortgage lender may take property of the property.
Mortgage payments are blended thoroughly to include the amount borrowed (the principal) and the charge for borrowing the money (the interest). How much interest a borrower pays depends on three things: how much is being borrowed; the interest rate on the mortgage; and the amortization period or the time the borrower takes to pay back the mortgage.
The length of an amortization period depends on how much the borrower can afford to pay each month. The borrower will pay less in interest if the amortization rate is shorter. A typical amortization period lasts 25 years and can be changed when the mortgage is renewed. Most borrowers choose to continue their mortgage every five years.
Mortgages are refunded on a regular schedule and are usually “level”, or identical, with each payment. Most borrowers choose to make monthly premiums, however some choose to make once a week or bimonthly payments. Sometimes mortgage payments include property taxes which are forwarded to the municipality on the borrower’s part by the company collecting payments. This can be arranged during initial mortgage negotiations on terms.
In conventional mortgage situations, the advance payment on a home has reached least 20% of the purchase price, with the mortgage not far above 80% of the properties appraised value.
A high-ratio mortgage is when the borrower’s down-payment on a home is less than 20%.
Canadian law requires lenders to purchase mortgage loan insurance from the Canada Mortgage and Housing Corporation (CMHC). This is to protect the mortgage lender if the borrower foreclosures on the mortgage. The cost of this insurance is usually passed about the borrower and can be paid available as one lump sum when the home is purchased or added to the mortgage’s principal amount. Mortgage loan insurance is not equivalent to mortgage life insurance which pays off a mortgage in full if the borrower or the borrower’s spouse dies.
First-time home buyers will often seek a mortgage pre-approval from a potential lender for a pre-determined mortgage amount. Pre-approval ensures the mortgage lender that the borrower can pay back the mortgage without defaulting. To receive pre-approval the mortgage lender will perform a credit-check on the borrower; request a list of the borrower’s assets and liabilities; and request personal data such as current employment, salary, marital status, and number of dependents. A pre-approval agreement may lock-in a specific rate throughout the mortgage pre-approval’s 60-to-90 day term.
There are some other ways for a borrower to get a mortgage. Sometimes a home-buyer decides to take over the seller’s mortgage which is called “assuming a preexisting mortgage”. By assuming a preexisting mortgage a borrower benefits by saving money on lawyer and assessment fees, will not have to arrange new financing and may obtain home finance loan lower than the interest rates available with the current economic market. Another option is for the home-seller to lend money or provide some of the mortgage financing to the buyer to purchase the home. This is called a Vendor Take- Back mortgage. A Vendor Take-Back Mortgage is sometimes provided by less than bank rates.
From a borrower has obtained a mortgage they have the option of taking on a second mortgage if more money is needed. A second mortgage is usually from a different lender and is often perceived by the lender to be higher risk. Because of this, a second mortgage usually has a shorter amortization period and a much higher rate.