“Life belongs to the living and he who lives must be prepared for changes.” – Johann Wolfgang von Goethe
Change is inevitable. Just like moving out of your childhood home or out of your apartment – we all aspire to move on to something greater, bigger or better. To the great unknown!
The same principle applies to your decision in purchasing your dream home. It’s a big change; there may be uncertainties along the way, but unlike the metaphorical unknown, with your home loan, there are variables that are under your control.
We’ve listed some key features and aspects that you must know when getting a mortgage:
Be aware of your financial capacity
It’s imperative that before you dive into a long-term commitment such as a home loan, you must know your capability to pay your monthly payments.
One way of checking is by judiciously creating a monthly budget. If you already have one, review it and see how much extra money you have tucked away for a down payment and how much more you’re able to put aside towards your mortgage amount.
Another factor that you must be aware of is your credit report. Mortgage brokers and lenders will scrutinize this because this gives them an idea of how responsible you are with your financial obligations. (Read: 6 Tips to Getting Your Credit Score in Tip-Top Shape).
What is the purpose of your home loan?
Obtaining a home loan is an enormous decision that mustn’t be taken lightly; the added responsibility can take a toll on you and your family for years to come, so, it’s important that you know why you’re doing it.
Either you want to purchase your very first home or you need to refinance your current one.
One way of acquiring your own home happens with the assistance of a mortgage. As mentioned earlier, you need to assess your finances and see how much you can afford for a home and then with the help of your mortgage broker, you can choose which mortgage loan best suits your individual circumstances.
On the other hand, for you to get a loan to refinance, one possibility is using your home equity. (Read: Everything You Need to Know about Home Equity Loan). The most common reason for doing this, is to have your home renovated (which may boost your home’s market value), use the equity for another investment property or for your child’s education.
Features of a Home Loan
Be familiar with these essential features when you’re getting a mortgage.
- Principal payment: This is the cost of the property that you’re purchasing.
- Down payment: For you to call your dream home yours, a down payment is required – this is you securing your home. Usually, the down payment varies depending on the lender’s offer or can be customized according to your budget. You may pay as low as five percent of the total principal amount; however, this will have some repercussions. The higher down payment you can pay, the better for your monthly mortgage payments.
- Interest payment: The interest payment is the cost of what you owe the lender for the money borrowed. This is paid monthly in addition to partial payments of your principal amount. You can check out some of the current rates here.
- Amortization period: Your amortization period dictates the longevity of your mortgage payments. In Canada, you can pay up to 25 or 30 years for your home loan.
Types of Mortgages
Not all home loans are the same. They differ in characteristics, terms and details. You need to understand each one so that you’ll know which one works best for your needs and budget. Here are the most common types:
- Fixed-rate Mortgage: This is one of the most common ones. As it connotes, a fixed-rate mortgage means that you’ll be paying the same rate for the entirety of your loan.
- Variable Mortgage (Adjustable Rate Mortgage): A variable rate mortgage is a type of home loan in which the interest rate is not fixed. It fluctuates with the market interest rate also known as prime rate and is usually stated as prime plus or minus a percentage amount.
- Convertible Mortgage: This is an adjustable rate loan that gives you the choice of changing your loan from a variable rate to a fixed-rate mortgage.
For more mortgage loan options, read Types of Mortgage Loans for Canadians.
Wrap everything in a bow
It all seems complicated at first. There are a lot of factors that need to be considered in making a wise choice for you and your loved ones.
The best thing that you can do is hire a Mortgage Broker who can make things easier for you. You need someone with experience and expertise in the field; you need someone to be transparent in explaining all the ins and outs of a home loan, carefully review your finances and suggest the best course of action.
Because obtaining a mortgage is not just about purchasing a home or refinancing it, it’s one step into executing the plan you’ve set out for your future.