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understanding how a mortgage works - cheryldevenney.com

Understanding How A Mortgage Works

Though a few fiscally smart folks have scrimped and saved in order to pay for their home out right, chances are when the time comes for you to buy your first house you’re going to be visiting your financial institution to sort out a mortgage.

What Is A Mortgage?
In the most basic of terms, a mortgage is a loan in which your house functions as the collateral. The bank or lending institution will loan you a large sum of money, usually about 80 per cent of the home price, although you may be able to negotiate for more. You will pay this sum back, plus interest, over a set period of time. If you fail to pay your loan back, however, the institution can take possession of your home through a process known as foreclosure.

Most mortgage terms run for 25 years, though this can be shorter or longer. Your mortgage repayment schedule will be structured in such a way that over the course of the early years of the mortgage, a greater percentage of each payment will cover interest charges and a smaller percentage covers the principle repayment. Overtime, this changes so that a greater percentage of each payment goes towards paying down the principal.

The more principle you pay down, the greater the equity (the amount of the home you own) you build in your home.

What Can You Afford?
As long as you know the approximate asking price of a house, you can roughly calculate what your mortgage payments will be every month using a mortgage calculator, like this one by TD Canada Trust. Your interest rates will depend upon the mortgage term you choose.

Your initial down payment will determine your interest rates, and will also lower your monthly payments.

It’s important to remember that the number calculated here only reflects the amount you will be spending on your mortgage, and doesn’t include the cost of living. If you think you are going to struggle to keep up with your mortgage payments, you may need to consider looking for a house in a lower price range. Lenders will ask for proof of your income, expenditures, and present debts, and may refuse to offer you a mortgage if they do not think you will be able to afford it.

How To Apply
Bank, mortgage brokers, or other financial institution, there are many businesses you can approach for your mortgage, though you should do your due diligence in finding the right lender and program for your financial needs. Look into their reputation and history, and, if possible, how many applications they approve and how many they deny.

The mortgage application process can be daunting, but your institution will offer a specialist who will walk you through the process. You can also seek outside advice from a financial adviser or counsellor. The following, however, are key factors that will be considered when you are being evaluated for a mortgage:

  • Credit report – up to date and without errors or discrepancies. It’s estimated that over 40 per cent of all credit reports contain errors. It’s up to you to make sure any errors are corrected as quickly as possible.
  • Credit score
  • Credit accounts
  • Down payment – the more money you can afford to put down up front the more likely you will be approved.Steady income
  • Interest rates
  • Available funds
  • Price ranges

That said, it’s a great idea to consider getting pre-approved for a mortgage before you start house hunting. Knowing the amount you are able to spend can take a lot of the stress out of buying a home. The pre-approval process is the same, except you should do it in advance of seeking out a realtor.

Be forewarned, however, that a pre-approved mortgage is different from a pre-qualification, which simply assess what you may or may not be able to afford based on your current income and savings potential. Your financial information may not be verified, and there is no credit application.

Whether it’s your very first home or you’re downsizing, when you’re in the market to move in the Durham Region, we can help! It’s our goal to work closely with you to make the most educated and market-wise decision for you and your family. Contact Cheryl Devenney and get on the road to your dream home, today!