Most people who are purchasing a home will require financial assistance to cover the cost of the home.
A mortgage is a legally binding contract that one party is going to lend another party some money. It is agreed upon that the money will be paid back at a certain rate, plus interest, over an agreed upon period of time.
This process is usually done through a mortgage broker and a financial institution. You will have many options when it comes to choosing a mortgage, but your lender or broker will help you find the mortgage that suits your needs.
During this process, you will determine:
- Amortization Period: The amount of time it would take you to fully pay off your mortgage (this is usually 25 years).
- Payment Schedule: how often you make your mortgage payments. (weekly, biweekly or monthly)
- Interest Rates: There are two types; a fixed rate which will not change for the duration of the mortgage or variable rate which will fluctuate with market rates.
- Mortgage Term: The length of time that the options and interest rate you have chosen are in effect. This can be anywhere from 6 months to ten years, at the end of this term, you can renegotiate your mortgage and choose new options if you see fit.
- Open or Closed Mortgages: Open mortgages let you pay off your mortgage early without any penalties. Closed mortgage offers limited (or no) options to pay off your mortgage early, but it usually has a lower interest rate.
- Pre-Payment Options: If you find yourself in a financial position where you can make extra payments, increase your payments, or pay your mortgage off completely, without penalty.
- Portability: is an option to transfer your mortgage over to another home with no penalty when you sell your current home. Loan insurance can also be transferred to the new home.
- Credit Score: Essentially your ability to pay your debts consistently over a certain point of time. A good credit score is very valuable, as lenders will always look at your credit history when deciding whether or not to approve you for a mortgage. It is a good idea to pull a copy of your credit report, and make sure there aren’t any errors or discrepancies.
What exactly does it mean to be “pre-approved”? A pre-approved mortgage lets you know how much you can afford, what your interest rate will be and how much your monthly mortgage payments are going to be. It is smart to get pre-approved before you start looking for a home. Getting pre-approved can help you to narrow your search down to a particular home price, size, type, or neighborhood. Pre-approvals can save you time as you will not be looking at homes that are out of your price range.
Once you get approved and find a property you like, you need to get the home evaluated to ensure price and condition of the home are satisfactory.
There are two parts to this financial agreement, principle and interest. Principal is the amount borrowed, whereas interest in the lenders fee that will be charged to the borrower in addition to the principal amount.
Having a pre-approved mortgage shows the seller that you’re serious and it can give you an advantage if you find yourself in a multiple offer situation.