Managing personal finances is an integral part of being an adult. In addition to this, if you have a family–children, spouse, and parents to take care of–you have to consider their financial requirements as well. Sometimes, your income alone cannot fulfill your dreams and aspirations. You may want additional money to buy a house, pursue higher education, start a business, or pay medical expenses.
While a person’s savings can relieve some financial burden when purchasing a house, it may not be enough to cover expenses. In such instances, it is hard to pay all your dues. Hence, mortgaging your home is a suitable choice. In this article, we will discuss the mortgage in detail.
What is a mortgage?
A mortgage is a type of loan that allows a person to buy a house. Mortgage payments can last for up to 25 years. The loan seeker pays the loan payment every month or so. If you are unable to make monthly payments, the lender can take possession of your house.
You can seek a mortgage from a bank. In addition to this, you can also seek mortgage broker services that compare various mortgages available to you.
Depending on your financial situation, there are various options available to you. Mortgage broker services charge a fee for a consultation. If you seek a mortgage for the first time, you should hire a broker service to help you make a financial decision. Broker services help people secure mortgages with unfavorable circumstances, such as poor credit history. They aid clients to get mortgage approvals fast with low-interest rates.
Components of mortgage payments
There are two main costs associated with mortgage payments. These include the principal amount, interest, taxes, and insurance.
The principal amount is the actual value of the house.
The interest rate is the additional amount paid to the lender for borrowing money. Several factors determine the interest rate of the mortgage. These include the following:
The credit score of an individual is one of the major factors that determine the interest rate. If you have a higher credit score, you will receive a low-interest rate. Good credit history is a testament to the fact that a person is likely to make payments on time.
Amount of loan and down payment
The amount of loan determines the interest rate. Hence, the value of the house and the type of loan you seek are factors that determine the interest rate. Likewise, the down payment you pay at the beginning of the mortgage also affects the interest rate. If you put down a substantial down payment, you end up paying a lower interest rate.
The local council collects property taxes on homes. The amount of taxes one pays depends on the value of the house.
A lender may collect property taxes from you and pay to the local council on your behalf. It depends on the type of agreement that you have with your lender. If you are a first-time buyer or have made a down payment of less than 20%, your lender will expect you to pay the property tax to them.
The lender determines the annual property tax on your home and incorporates it in the monthly mortgage payments for that year.
Insurance on a mortgage provides you some protection in the case of an unexpected circumstance.
Mortgage default insurance is mandatory if the down payment is less than 20% of the total amount. The insurance protects the lender if a person is unable to pay the monthly payments. Moreover, you must pay the premiums on mortgage default insurance in full before the first mortgage payment. There are several mortgage insurance providers in Canada. These include Canada Mortgage and Housing Corporation (CMHC) insurance, Genworth Canada, and Canada Guarantee.
In addition to this, you also need homeowner’s insurance for your home. However, the homeowner’s insurance is not included in your mortgage payment. It is paid to the insurance company, while the rest of the money goes to the lender. Homeowner’s insurance protects the owner during property damage due to natural disasters, theft, fire, etc. The homeowner’s insurance continues even after you have paid off the mortgage.
In some cases, a lender may collect homeowner’s insurance and pay to the insurance company on your behalf.
Step-by-step process of applying for a mortgage
Before you apply for a mortgage, there are several things that you need to consider to check if it is favorable in your case. The application process of a mortgage is divided into the following stages:
1. Pre-approval Stage
In the pre-approval stage, the lender will perform background checks, including your finances. The lender will check your income, debt, and assets.
You have to provide proof of employment, including position, salary, duration of employment, etc. You also require identification papers issued by the government.
In addition to the property, assets include the cars or other motor vehicles that you may own.
Having a high credit score will help you in getting approved for a mortgage. Hence, the lender will check your credit card balances, loans, and other debts. Check your credit report and make sure that there are no errors in it. Errors in your personal information, bank account information, listed accounts, and others can negatively impact you, especially if you seek a mortgage.
During this stage, you should collect the necessary documents for the mortgage application.
There are various sources through which you can get approval for a mortgage. Banks and credit unions offer mortgages on a property. There are mortgage brokers as well that offer a mortgage. However, these do not provide a mortgage to you directly; they find a lender for you. The advantage of hiring a mortgage broker service is that you can find several mortgage plans. So you can choose one that best suits your requirements. It explains why many people with a poor credit history can obtain a mortgage from a broker service. If you hire a mortgage broker service, they will help you determine the amount of mortgage that you can apply for.
If you have qualified for a mortgage, it doesn’t guarantee that you will get a loan. There may be several reasons why a lender refuses to provide a loan to you. Each lender, including banks, credit unions, and brokerage firms, has a policy and standard for approving a mortgage application. You may want to change your requirements to get a loan.
2. Shopping for a house
After getting approved, start looking for houses. You should contact an experienced real estate agent in your area to help you find a home. You can also check out listings on websites and find a house that fits your criteria. A real estate agent can help you in making an offer for a house. They will also help you with the relevant documentation and setting up meetings with the seller. You can also perform a home inspection to check if any renovations are in order. It may help you in lowering the price of the house.
3. Mortgage Application
After having found a house, you are ready to apply for a mortgage. You need to fill out several documents to apply for a mortgage. Each of the documents requires relevant information regarding your employment, income, debts, assets, etc.
The Loan Estimate is a document that is drafted based on the information that you provide. It provides an estimate regarding the loan amount and also details the terms of the loan. Information regarding penalties for missing a payment and other clauses are also present in this document. The document only provides an estimate.
After you apply for the loan, the application is processed.
In this stage, the application is either accepted or rejected, depending on your credit history. The interest rate is also determined in this stage. Once the lender decides the interest rate, there is no way to change it.
Before you finalize the loan agreement, you have some time to review the underwriting. You can check the document for errors; however, there are very few chances of finding them. You can also make changes to the contract. Once you approve the agreement, you will visit the property and have a final meeting with the lender.
After signing several documents, your application and approval of the mortgage are complete. You can now live in your house.
When it comes down to choosing a mortgage, you have some options. Some of these are as follows:
● Home Equity
Equity is the difference between what you owe and the value of your home. The equity of your house can change throughout the mortgage. It increases as you pay off the loans. Many describe equity as an asset that determines your net worth. You can use home equity to invest in various ventures. Some even use the money obtained from equity for retirement.
Fixed vs. adjustable-rate loans
Adjustable-Rate Mortgage (ARM) are loans with a changing interest rate. The monthly mortgage payments change depending on the interest rate. The other option is a fixed-rate loan, in which the interest rate remains the same throughout the mortgage.
If you choose a flexible repayment plan, you have the option of choosing when to pay the loan back. Whether you want to pay it back on a monthly or bi-monthly basis is your choice. With a flexible repayment plan, you can pay an additional amount to the lender (on top of the regular payment). Paying an additional amount will help you in reaching the closing date quickly.
● Reverse Mortgage
In some cases, you can reverse a mortgage. It means that you can get some money out of your home equity. You can use it for renovation, school fees, and medical bills. It can help individuals if the duration of the loans is 25 to 30 years.
● Skipping loan payments
Due to various reasons, you may be unable to make payments. In such an instance, a lender may offer a repayment break that lasts up to a year. However, to get approved for this, you must have made additional payments at some point in time.
Types of mortgage
There are different types of mortgages. Some of these are as follows:
1. First Mortgage
A first mortgage is a mortgage that you seek to own a house. The duration of the mortgage can last around 25 years.
2. Second mortgage
Homeowners may seek a second mortgage for a down payment, refinance the first mortgage, or fund other ventures. The second mortgage is sought against home equity. A person who seeks first and second mortgage must pay the loan on the first mortgage before paying off the second one. A second mortgage is either a Home Equity Installment Loan or Home Equity Line of Credit (HELOC)
● Home Equity Installment Loan
A home equity loan is a loan that homeowners seek to pay for remodeling and renovation projects. In addition to this, a person may seek a loan to pay for a wedding or pursue higher education. In this type of loan, the homeowner receives a lump sum amount. The duration of the loan may vary depending on the amount.
● Home Equity Line of Credit (HELOC)
HELOC loans are determined based on your credit history that has a lower interest rate. You can borrow money over a course of time. The loan may also be tax-deductible. Hence, it may have a lower cost than HELOAN. You can use a HELOC loan for home renovations and other purposes.
3. Fixed-rate mortgage
The interest rate for a fixed mortgage remains the same for the duration of the loan. The monthly payment remains the same as well. However, it takes a longer time to build the equity of your house. Moreover, the interest rates are higher than adjustable-rate mortgages.
4. Adjustable-rate mortgage (ARM)
In this, the interest rate changes over time. The advantage of this type of mortgage is that the homeowner pays less interest rate for the first few years. Hence, you can build your home equity quickly. However, the loan payments may become hard to pay back.
To apply for a mortgage, you must be aware of its features and its types. In addition to this, you should know various lenders so that you can seek a mortgage that best suits your requirements.