What’s a Mortgage?

Jessica Lyn
by Jessica Lyn November 14, 2016 / No Comments

A mortgage is a loan used in the purchase of a home. The key characteristics of a mortgage includes the down payment, mortgage rate, amortization period, and payment frequency.

Here’s what you need to know about mortgages:

Down payment

A down payment is a lump sum used to reduce your total loan value and typically ranges from 5% to 20% of the asking price of you home. When purchasing a property, the total loan value is equal to the asking price of your home less the down payment plus CMHC Insurance. CMHC insurance is required for high ratio loans, which includes mortgages with down payments less than 20%.

Mortgage rates and options

The mortgage rate is the interest rate on your mortgage. There are two types of mortgage to choose from: A fixed-rate mortgage and a variable-rate mortgage. With a fixed-rate mortgage, the mortgage rate and payments you pay are constant throughout the term of your mortgage. However, with a variable-rate mortgage, the rate is based on your financial institution’s prime rate plus or minus a set number of basis points. And if the prime rate changes so will your mortgage rate and the amount of the payment that goes towards your principal.

To get the best mortgage rate, compare rates from multiple providers. This can be done through the help of a mortgage broker. A mortgage broker serves as an intermediary between lenders and borrowers, helping to secure a mortgage rate. A mortgage broker can negotiate on a borrower’s behalf and pass on some of their volume discount to their clients. By using a mortgage broker, you’ll have access to several lenders and products and can take advantage of your broker’s industry knowledge. In addition to all these benefits, the services provided by a mortgage broker are free to borrowers as they are paid by the lenders. Since a low mortgage rate is the best way to reduce your mortgage payments and the total amount of interest paid on your mortgage, consider the services of a mortgage broker.

Amortization period

The amortization period of a mortgage is the length of time in which you will pay off your mortgage. The typical amortization period for a mortgage in Canada is 25 years. Extending your amortization period is one way to reduce the amount of your payments but results in an increase in the total amount of interest paid on your mortgage. In contrast, the shorter your amortization period is the faster you’ll pay off your mortgage and the less interest you will pay. To see the full effect of differing amortization periods, use a mortgage payment calculator and look at an amortization schedule. An amortization schedule will show you how each of your payments reduces your loan balance, how much of your payment goes towards interest, and how much goes towards reducing your principal.

Payment frequency

The payment frequency is how often you make your mortgage payment. Typical frequencies are monthly, bi-weekly, and weekly. Some providers also offer accelerated payment options to pay off your mortgage faster. If you make more frequent payments, you’ll be able to pay off your mortgage faster.

Closed vs. open mortgages

In addition to variable- or fixed-rate mortgages, mortgages can be either closed or open. A closed mortgage is best if you don’t plan on paying off your mortgage in full in the short term. If, however, you want to pay off the mortgage before the specified date, you’ll have to pay a penalty. By agreeing to keep your mortgage for the full term, you’ll receive a lower interest rate than in an open mortgage. With an open mortgage, you have the flexibility to pay off the mortgage at any time without a penalty. The cost of this increased flexibility is a higher mortgage rate. Since closed mortgage rates have a lower interest rate, you may be curious as to why anyone would choose to have an open mortgage. Individuals who select an open mortgage may expect to receive a large amount of money in the near future that’d enable them to pay off their mortgage. This could be from an inheritance or from selling their home. If, however, you don’t expect to receive a lump sum of money anytime soon, a closed mortgage is better because you’ll receive a much lower interest rate.

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