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Frequently Asked Mortgage Questions

1. Why is a mortgage pre-approval important?
2. May I use my RRSP to make a down payment?
3. What is an open mortgage?
4. What is a closed mortgage?
5. What is a fixed rate mortgage?
6. What is a Variable Rate mortgage?
7. Should I pay my mortgage payment weekly, bi-weekly, or monthly?
8. What is amortization? And what is the best amortization period to seek?
9. What is a high ratio or insured mortgage?
10. What is the best term to consider?
11. Can I have my property taxes included with my mortgage payment?
12. What is the penalty if I sell my house before the term expires?

 

1. Why is a mortgage pre-approval important?

Mortgage pre-approval is important for a number of reasons:

2. May I use my RRSP to make a down payment?

A federal government plan allows first-time homebuyers to use their RRSP's to help finance their home purchase. This money can be used as a downpayment, or to help with other closing costs. The RRSP home ownership withdrawl forms are available from your RRSP holder, and for more information you can view the Canada Revenue Agency website at www.cra.gc.ca. The basic criteria are as follows:

3. What is an open mortgage?

An open mortgage gives you the most flexibility in making extra payments towards your mortgage principle and even lets you pay off your mortgage entirely whenever you wish to.  It allows you to pay off large portions, or even the entire mortgage, without penalty.

Warning! Not all open mortgages are created equal. Check to see just how ‘open' your mortgage is!

4. What is a closed mortgage?

Compared to open a closed mortgage offers little to no privileges in paying off your mortgage early. You cannot pay off your mortgage without attracting penalties, called prepayment penalties, from the lender. Often though, you do have the ability to prepay up to 15-20% of the original mortgage balance, each year.

5. What is a fixed rate mortgage?

It simply means that for the term of your mortgage the interest rate charged is a fixed amount and does not change or fluctuate during the term of your mortgage.

6. What is a Variable Rate mortgage?

Compared to a fixed rate mortgage a variable interest rate 'floats'. Although the mortgage payment amount may stay the same the actual interest charged may change on a monthly basis. A drop in interest rates is great news for you and it will mean that more of your mortgage payment will go towards reducing your mortgage principle. If interest rates rise then less money will be used for reducing your principle and will instead be used for paying higher interest costs. If you think interest rates will fall over the next 3 to 5 years then taking a variable mortgage makes a lot of sense.

With mortgages you pay a price for certainty. You generally pay more for a fixed rate mortgage because the lender is taking the risk as to what the rates will do by fixing the rate for you. You generally pay less for a variable rate mortgage because it is you that is taking the risk of uncertainty as to how interest rates will move - up or down.

With low interest rates variable interest rate mortgages have become popular. Often it is possible to get a rate at or under the bank prime rate.

7. Should I pay my mortgage payment weekly, bi-weekly, or monthly?

Paying weekly or biweekly gets more money onto your mortgage over the year. This will add up to paying your mortgage down faster over the long term.

If your mortgage payment was a $1000 a month, and you paid it weekly at $250/week, at the end of the year you would have paid $13,000 towards your mortgage as opposed to $12,000 paying monthly.

If it fits your paydays, then take a weekly or biweekly payment. If it doesn't, pay monthly, and put an extra payment on once a year...you will get almost the same benefit!

8. What is amortization? And what is the best amortization period to seek?

Your amortization is the total length of time it will take you to pay off your mortgage. Until recently, the longest amortization was traditionally 25 years.  Now borrowers can amortize as long as 25 years if high ratio and 35 years if conventional. This means that all things being equal, your mortgage will be paid off by the end of the amortization. However, your amortization period will not stay constant because different borrowing terms at each renewal time will vary the amount of interest charged over your amortization period. The length of time to pay off your mortgage will be determined by the interest charge, the loan amount, and the amount of payment you make. You should first qualify for a 25 year amortization (or 35 if conventional) and then reduce the amortization by making a larger monthly payment if you can. Most lenders allow you to pay extra over and above the required monthly payment (usually monthly and/or annually), and it is by paying extra that you will reduce your amortization and therefore your total interest charges over the life of the mortgage.

9. What is a high ratio or insured mortgage?

Whenever you need a mortgage loan that is greater than 80% of the current market appraised value of your home, it is considered a high ratio or insured mortgage.  Canada Mortgage and Housing Corporation (CMHC) and Genworth Financial are the two main insurers in Canada. CMHC and Genworth Financial insure the lender in case you default on your loan. You must pay for this insurance premium, which is usually added to the mortgage requested. The premiums are as follows:

80.01% to 85% = 2.80%

85.01% to 90% = 3.10%

90.01% to 95% = 4.00%

10. What is the best term to consider?

Usually the shorter the term, the lower the rate, however that is not always the case. Many people prefer the comfort of a longer-term mortgage for it's stability. I often recommend a longer term for First Time Buyers, but a Variable rate mortgage is also very popular and may be the right product for you. When we discuss your options we will determine together what is best for you and your particular financial situation.

11. Can I have my property taxes included with my mortgage payment?

Yes, some institutions will allow the option of paying your own taxes, or having them included with your mortgage payments. Some lenders may insist that they be included with the mortgage due to the loan to value ratio!

12. What is the penalty if I sell my house before the term expires

All lenders will charge a penalty if you pay your mortgage out prior to the end of the term. Usually the penalty is the greater of three months interest, or the interest rate differential, however, this does vary from lender to lender, so be sure to ask me for more information!