Mortgage 101: The Basic Mortgage Terms You Should Know
Being a first time homebuyer can be overwhelming. There is much to know and much to do in the process of purchasing your first home home. Thankfully, aligning yourself with a great realtor will take much of the stress off your shoulders as your realtor will be with you every step of the way to guide you through the process. A big (and very important) part of the process of purchasing your first home will be getting a mortgage pre-approval, and then later a firm approval. A great realtor will be able to give you trusted recommendations when it comes to choosing a mortgage lender/broker to work with. You will likely have many options when it comes to choosing your mortgage, and your lender or broker will help you find the mortgage that best matches your needs. Becoming familiar with the following terms and options will be helpful to you in your decisions.
✨Mortgage: A legal agreement between you and the bank (or other creditor), who is lending you funds with interest. A mortgage allows the lender to take possession of the home if you fail to repay the loan on time as the property is the security for the loan.
✨Amortization period: The length of time you agree to take to pay off your mortgage (usually 25 years).
✨Mortgage term: The length of time that the options & interest rate you choose are in effect. This can range anywhere from 6 months to 10 years. When the term is up, you can renegotiate your mortgage & choose the same or different options.
✨Payment schedule: How often you make your mortgage payments. This can be weekly, biweekly, monthly or accelerated weekly or biweekly.
✨Down payment: The amount of money that you put toward the purchase of your home. In general, to purchase a property, the minimum down payment is 5% for a property value of $500K or less. For properties between $500K-$999K, the down payment is 5% of $500K plus 10% of the remaining amount. Anything over $1M is an automatic 20% down payment.
✨Prepayment options: The ability to make extra payments, increase your payments or pay off your mortgage early without incurring a penalty.
✨Mortgage stress test: The test you will need to pass in order to qualify for a mortgage loan with federally regulated lenders & credit unions. The stress test ensures that you can afford payments at a qualifying interest rate that is typically higher than the actual rate in your mortgage contract. This helps ensure that homebuyers won’t take on too much debt and will have the means to make their mortgage payments if interest rates rise or their income decreases.
✨Portability: An option that lets you transfer your mortgage to another home with little or no penalty when you sell your existing home. Mortgage loan insurance can also be transferred to the new home.
✨Fixed Rate: The rate will not change for the term of the mortgage.
✨Variable Rate: The interest rate fluctuates with the market rates.
✨Protected (or capped) variable rate: The rate fluctuates but will not rise over a set maximum rate.
✨Open mortgage: Gives you the option to pay off your mortgage in full or in part at any time without any penalties.
✨Closed mortgage: Offers limited or no options to pay off your mortgage early in full or in part, but it usually has a lower interest rate.
✨Conventional mortgage: A loan that is equal to or less than 80% of the lending value of a home. This requires a minimum down payment of 20%.
✨High-ratio mortgage: A loan that is over 80% of the lending value of a home. This means the down payment is less than 20% and will require mortgage loan insurance.
✨Mortgage loan insurance: If your downpayment is less than 20%, you'll be required to have mortgage loan insurance. This protects lenders against the risk of mortgage default. Insurance premiums on mortgage loans are calculated as a percentage of your total loan amount and are based on factors including the size & source of your down payment
In closing, having a general idea on what these mortgage related terms mean will set you up for success when arranging for your mortgage in future.
If you have any questions about acquiring a mortgage, first time home buying or real estate in general please don’t hesitate to reach out - I would love to help!
The Condo Confidential