If you are a first-time home buyer there is a good chance you’ve never heard some of the common words associated with mortgages. A good mortgage agent will guide you through and explain each step of the process to you, and if you don’t understand something be sure to ask questions. To help you prepare for your first mortgage pre-approval meeting here are some terms you’ll want to understand.
This is the length of time you are locked into your mortgage with a specific lender before you have to renew. Many first-time homebuyers choose a term of 5 years; however, other term lengths are available such as 1-year, 3-years, 7-years, etc. The length of the mortgage term that you choose will also effect your interest rate that you receive. When deciding on your term length it is important that you speak with your mortgage broker about your long-term and short-term goals. Your mortgage term can also be broken but there can be some expensive penalties to do so, you’ll also want to ask your mortgage broker about these as they can vary greatly from lender to lender.
This is the total length of time you will have your mortgage until it is paid off in full (granted you don’t refinance, move, or make any changes to payments). Most mortgages are amortized over 25 years. If you use a mortgage calculator online (such as this one) you can see the difference the amortization can make on your payment.
This is the percentage of your home purchase that you will have to pay to your lender. The minimum down payment in Canada is 5% (for a $200,000 home this would $10,000). The majority of first time home buyers use a 5% down payment but there are some benefits to putting a larger down payment on your home which you can ask your mortgage broker about. When saving it is also important to not forget about closing costs, most lenders will want to see 1.5% of your home purchase saved in your bank account as well as your down payment (so to purchase a $200,000 house you’ll actually need $13,000 saved).
Everyone always focuses so much on this four-letter word, the lower your interest rate the lower your mortgage payment will be. A good mortgage broker will find you the lowest rate possible; however, they will also make sure that the mortgage features you receive are just as good (these can at times be just as important as the interest rate).