Whether buying a new home, selling or refinancing, you need expert mortgage and financing advice to make solid investments decisions. Please feel free to contact me to answer any questions you have and assist you with putting you in touch with the right people to look after your financing needs.
Conventional and High Ratio Mortgages - To qualify for a conventional mortgage, you simply have to have a 25% down payment of the purchase price, with the mortgage not exceeding 75% of the appraised value.
If your down payment is less than 25%, then you qualify for a high-ratio mortgage. This type of mortgage requires loan insurance, which can cost an additional 0.5% to 3.75% of the mortgage amount. With this type of mortgage you could also be limited to a maximum house price.
Second Mortgage - Of course, if you cannot add on to your mortgage, you may consider a second mortgage. Each mortgage uses your home as security and gives the mortgagee the right to take your home if you default on your loan. The first mortgagee gets paid first in cases of default and has the best chance of recovering all of its money. So it only goes to figure that subsequent mortgages usually come with a higher interest rate.
Mortgage Features – Here are some mortgage options you should know about:
Every lending institution is different, and each will have their own customizable mortgage options. When you’re hunting for a lender and a home, see how the following features could be beneficial to you.
Prepayment – This is a wonderful option if you receive regular bonuses or if your income fluctuates throughout the year. With a pre-payment privilege, you have the right to make payments toward the principal portion of your mortgage over and above the monthly payments. A mortgage with a pre-payment option is closed. An open mortgage means you can pay the entire principal sum without notice of bonus.
Portability – If you still have time remaining on that fantastic loan you negotiated, portability is one option you’ll want to discuss with your lender. Quite simply, it means transferring the balance of your current mortgage at the existing rates and with the existing terms and conditions, to your new home.
Assumability – Let’s say that the vendor has negotiated a dynamite mortgage. With an assumable mortgage you, the purchaser, simply assume the obligations of the mortgage. This is a wonderful feature especially if the terms are more favourable than the existing market conditions would allow. Remember, when it is time for you to sell, you may still be liable for any mortgage you allow the buyer to assume. This means if the buyer stops making payments, you could be accountable for the payments. Be sure to have the subsequent buyer approved for the assumption of the payments, thereby avoiding this potential land mine.
Expandability – If you need additional funds down the road, will your mortgage terms allow you to increase the principal amount? Usually, your new rate will be a blended amount of the initial mortgage rate and the prevailing rates. It’s a great option to discuss with your lender if you foresee large expenses in your future like renovation or education costs.
Mortgage Term – Over the course of your amortization period, you may have many different mortgages. The term is simply the length of time that interest rates, payment schedules and obligations to the lender exist. When the term comes to a close, you will have the option to renew your mortgage (taking into account current market conditions) at your current or new lending institution. You can also put a lump sum toward the principal without restriction, or pay off your entire mortgage without penalty. If you wish to change the structure of your agreement during the term you may have to pay a substantial fee to the lender.
Choosing Security or Flexibility – Mortgages are available with closed, open and convertible options, with fixed or variable rates. The options you choose will reflect your beliefs about the market — is it going up or down? — and your short-term goals and desire for long-term security.
Amortization – This is the amount of time over which the entire debt will be repaid. Most mortgages are amortized over 15-, 20-, or 25-year periods. The longer the amortization, the lower your scheduled mortgage payments, but the more interest you pay in the long run.
For payment comparison over various amortization periods, refer to the schedule of payments.
Schedule of Payments – There Are Ways to Reduce Your Interest Payments
1. Negotiate a shorter amortization period. (That’s the number of years over which you’ll pay off the total amount of the mortgage. Don’t confuse this with the term of the mortgage, which can run from 6 months to 10 years and must be renegotiated.) A shorter amortization period will mean higher monthly payments, but you’ll be paying more principal with each payment. Consider this:
Let’s say you borrowed $100,000 at 10% interest. (I’m using round numbers for ease of illustration and assuming a constant bank rate. You know that today, you’ll certainly be able to get a lower rate.)
2. Accelerating your payments. Opt for a weekly or biweekly payment schedule. More payments per month mean less overall interest. Let’s go back to our $100,000 loan at 10% for 25 years.
3. Put lump sum payments toward your principal.
When negotiating your mortgage, ask how frequently you can make a lump sum contribution. Most financial institutions allow a percentage of your overall mortgage to be contributed on your annual mortgage anniversary date. Depending on the type of mortgage you select, you may also be able to negotiate additional monthly, or even weekly, payments. These payments will rocket you toward mortgage freedom.
OK, here’s another illustration assuming you have an $80,000 mortgage at 8% with a 25-year amortization, and you’re able to put an additional $2,000 lump-sum payment toward it every year.
No Lump-Sum Payments$2,000 Annual PaymentsMortgage-Free25 years14.8 years Total Interest Paid $103,165$55,549
Open Mortgage – This type of mortgage offers a great deal of flexibility, as it can be repaid in part or full at any time without penalty. This is a great mortgage if you believe interest rates are moving down or if you plan to move in the near future. The term may be limited to six months or one year.
Closed Mortgage – Here the interest rate is fixed for the full term of the mortgage, and you will have to pay a penalty to change the agreement conditions. This type of mortgage is ideal for buyers who suspect that interest rates will rise and who are not planning to move in the near future. This type of mortgage is usually available in a wide variety of terms.
Convertible Mortgage – With this mortgage, you’ll enjoy the same peace of mind as a closed mortgage, plus the flexibility to convert to a longer closed mortgage at any time without penalty. If you think rates will drop, this will allow you to wait until you feel they have hit bottom, or if rates rise, you can lock in.
Additional Costs – Before you calculate the amount of your down payment and determine what you can afford, it’s a good idea to set aside a few thousand dollars to cover the extra costs that seem to spring out of nowhere. Here is an overview of costs you could encounter. The good news is that not all of them will apply.
Property Taxes – If the Vendor has paid a portion of the taxes in advance, you will be responsible for reimbursing the Vendor on closing. Plus, if you have a high-ratio mortgage, your lender may require that you have your property taxes added to your mortgage payments.
Utility Fees - Utility fees are calculated through a meter so you will be responsible for paying what you have used up on the meter.
Land Transfer Tax– This applies in most provinces and ranges from 1% to 4%. For instance, in Ontario, you’ll pay 1% of the first $55,000 – $250,000 and up to 2% of any amount over $400,000.
Survey Fee – Your lender will require an up-to-date survey. You can make it a condition of the Offer to Purchase that the Vendor provide a survey, or you will have to have one done. If there is no survey available, you may purchase “Title Insurance” in lieu of a survey which saves you about $500 – 700.
Appraisal Fee – A basic appraisal usually costs under $250.
Property Insurance – Your lender will insist that you have insurance on your property because your home is used as security for the mortgage.
Service Charges – You’ll be charged for telephone, cable and a variety of other services that you hook up at your new home.
Lawyer (Notary) Fees – Each real estate transaction requires the assistance of a legal professional to review the Offer to Purchase, search the title, draw up the mortgage documents and take care of the details on the day of closing. Lawyers fees range widely depending on the complexity of the transaction. Ask your Royal LePage sales representative to recommend a lawyer. And remember, fees can be negotiated.
Mortgage Loan Insurance Premium and Application Fee – Mortgage loan insurance will be necessary if you have a high-ratio mortgage (less that 25% down payment). The application usually costs $75 with a valid appraisal, otherwise it’s $235. The actual insurance premium will range from .5% to 3.75% of the purchase price and is added onto the mortgage.
Mortgage Broker Fee – Some brokers may charge as much as 2% of the total mortgage to find you a lender. In most cases though, the broker is paid by the lender. Buyers with good credit should not have to pay a fee.
Moving Costs – Whether you’ve decided to do it yourself or hire a moving company, now is the time to budget for the costs involved.
Estoppel Certificate – If you’re moving into a condominium (complex not necessarily a high-rise) this certificate outlines the condominium corporation’s financial and legal state. It will cost you up to $50.
Condominium Fees - These monthly fees vary from complex to complex. The fees are applied to everything from grounds keeping and carpet cleaning to security personnel and health club maintenance. Depending on the type of structure, these fees will usually be a few hundred dollars.
Home Inspection Fee – For around $300, depending on the size of your home, you’ll receive a complete written report about the condition of the structure. Do your research and hire a reputable firm.
Renovation and Repairs – Your home inspection may indicate the need for some general repairs or a major project. Have some money set aside, particularly if you are purchasing an older home.
Redecoration - Your taste will be different from the previous owner. Set aside money to paint and wallpaper. Prepare a list of things you can live with, for now, and decorating faux pas that need immediate alteration.
Water Quality Certification – If you are purchasing a home with a well, you’ll want to ensure the quality of the water. This will cost approximately $50 to $100.