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What is a Mortgage?

A mortgage is a financial arrangement wherein a home buyer borrows money from a lender, typically a financial institution, to acquire a home. In return, the borrower is required to pay interest to the lender as a fee for providing the loan.

Why Do You Need a Mortgage?

Homes come with a substantial price tag that many individuals cannot afford to pay in full on their own. A mortgage serves as a solution that allows home buyers to purchase a property by making an initial payment, known as a “down payment,” which is only a percentage of the total purchase price.

Understanding the Down Payment

A down payment is the initial sum of money that a home buyer contributes toward the overall cost of a home. For example, if you intend to buy a home priced at $800,000 and have $160,000 to put toward the purchase, your down payment would amount to $160,000.

Determining Affordability

While a minimum down payment requirement is set at 5%, having this amount saved does not automatically mean you can afford any property. A borrower’s affordability is assessed through a comprehensive evaluation of their assets, liabilities, and income. These evaluations, known as debt service ratios, determine if you possess the financial capacity to comfortably manage your down payment, ongoing expenses, and mortgage payments.

Types of Mortgage Approvals: Pre-Approval, Approval, or Refinance

Mortgage Pre-Approval:

Pre-Approval precedes the actual home purchase and provides potential homeowners with the assurance that they can spend up to a specified amount, with a lender ready to offer them a mortgage.

Mortgage Approval:

Mortgage approval is granted once a buyer has a purchase and sale agreement in place, indicating their commitment to a specific property and closing date. The approval process establishes the lender and outlines the terms and conditions of the mortgage, including interest rates and features.

Refinance / Switching a Mortgage:

Individuals who already have an existing mortgage may consider switching to another institution or increasing their mortgage balance through refinancing. This can be motivated by a desire to explore better options or extract existing equity. However, it’s important to note that if you plan to refinance or switch your mortgage, you can typically borrow up to 80% of your property’s value.

Open vs. Closed Mortgage: The Distinction

Most home buyers opt for closed mortgages due to their more favorable rates and suitability for the average home buyer. Open mortgages are typically chosen when a buyer is involved in activities such as house flipping or anticipates a substantial financial windfall.

Closed Mortgage:

Closed mortgages cannot be fully repaid before the borrower’s term concludes without incurring a penalty. However, they tend to offer lower interest rates and better features compared to open mortgages.

Open Mortgage:

Open mortgages allow borrowers to repay their mortgage in part or in full at any time without incurring penalties or notice requirements. These mortgages are suitable for those expecting a short-term stay or anticipating significant financial inflow. It’s important to be aware that open mortgages usually come with higher interest rates.

Fixed vs. Variable Rates: What’s the Right Choice?

A fixed-rate mortgage maintains a consistent interest rate throughout the mortgage term, ensuring that your payments remain constant over time. In contrast, a variable rate mortgage involves interest rate adjustments based on market conditions, resulting in potential rate fluctuations and changes in the amount of interest paid.

Purchasing with Another Party or with Parental Assistance

Buying with a Co-Applicant:

When another person is jointly responsible for the mortgage and co-owns the property with you.

Buying with a Cosigner:

Involves an immediate family member cosigning the mortgage without acquiring ownership in the property, allowing you to afford a more expensive home if the cosigner possesses the financial means and creditworthiness.

Buying Alone:

In this scenario, you are solely responsible for the mortgage.

Buying Alone with a “Gift”:

When you purchase a property alone, but a portion of the down payment comes from someone else, like a family member. This financial contribution is intended exclusively for the down payment and is not expected to be repaid by the buyer.