First time home buyer basic terms
Posted on Jul 19, 2012 in Mortgage Market Updates and News
Glossary of Terms for First Time Home Buyers
Buying your first home can be a complicated and intimidating process. The help of a Mortgage Professional, like Sharie Marie Francoeur with TMG The Mortgage Group Canada Inc, can make the process smooth and enjoyable. To get you started feeling confident, take a look at the basic terms below. Feel free to call or email, 2507300239 email@example.com, with any questions you may have.
The amount of money you need to borrow, usually the difference between the purchase price of the property and the down payment. As you repay the loan over time, the amount of principal declines.
The cost you pay to borrow money. The interest rate is usually expressed as an annual percentage rate, compounded semi-annually. 5 year fixed interest rates right now are at historic lows of 3.09%!
A regular installment usually made up of principal and interest, by which you repay the mortgage over its term to maturity. You can pay monthly, biweekly, accelerated biweekly, semi monthly, weekly or accelerated weekly.
The actual number of years it will take to repay the entire mortgage, generally a period of up to 25 years. The longer the amortization, the lower your regular payments but the more interest you pay in the long run.
The length of time that a specific mortgage agreement covers is generally between six months to ten years. When the term matures or expires, you generally renogotiate the remaining balance for another term at rates and conditions in effect at that time. Generally the longer the term, the higher the rate.
A closed mortgage term means that the interest rate is locked in or closed for the duration of the term. If you want to renegotiate the rate or payoff the balance before the end of the term, you will be subject to a prepayment penalty. Interest rates for closed fixed-rate mortgages are generally lower than for open fixed-rate mortgages. Closed mortgages are available in a range of terms from six months all the way up to twenty-five years. First-time homebuyers often choose five year fixed-rate terms, feeling more secure and comfortable knowing their payments and interest rate won’t change for at least five years.
Open mortgages offer greater flexibility than closed mortgages since they can be repaid either in part or in full at any time without a prepayment penalty. Open mortgages are good options for buyers who are planning to move again in the near future, are expecting to receive a sum of funds and they want to accelerate the pay down of their principal, or believe that interest rates will be moving downward. Interest rates for open mortgages are generally higher than for closed mortgages because of the added flexibility.
If you’d prefer the security of knowing exactly what your rate and payment will be, a fixed rate mortgage is a good option to consider. Especially if you’re comfortable with rates as low as they are now and you don’t want to continually watch or worry about which direction they are going. Fixed rate mortgages are available in open or closed terms.
Variable rate mortgages
A variable rate mortgage implies a rate that is variable, or fluctuates according to the rate set by the Bank of Canada. If interest rates go down, more of the payment is applied to reduce the principal; if rates go up, more of the payment is applied to interest. Variable rate mortgages have become increasing popular because they provide the flexibility to take advantage of falling interest rates, offer a lower rate than a fixed-rate mortgage, combined with the ability to convert to a fixed term at any time with no additional cost.
Ensure that your lender offers you a generous combination of options to accelerate the pace at which you can pay down your mortgage without penalty. Lump sum prepayments, permanently increasing your mortgage payments and the ability to make extra payments are powerful money saving options. Anything you pay over and above your regular payment amount will go directly towards your principal.
Match the frequency of your mortgage payments with the frequency of your pay periods. Not only is it easier to budget and manage your cash flow, but more frequent payments can take years off your amortization and save thousands of dollars in interest. Biweekly payments, for example, means you’ll make 26 payments in a year, equal to 13 monthly payments instead of 12. It is this “accelerated” pace of repayment that allows you to repay your principal faster, saving you money.
If you decide to sell your home, subject to geographic restrictions, portability allows you to transfer the terms, conditions, and interest rate of your existing mortgage to your next home. For example, this may allow you to keep a low interest rate and avoid paying a prepayment penalty if you sell one house and buy another.
An assumable mortgage allows any future buyer of your home to take over the balance of your mortgage if you sell your home, assuming all your obligations and releasing you from the mortgage. This can be a particularly attractive selling feature if your existing mortgage provides a better rate than is currently available at the time of sale.
There are lots of options and features available today that let you customize your mortgage to your own unique financial goals and objectives. There are however, two basic principles that should always guide your mortgage strategy. By following them, the equity in your home will grow more quickly and you’ll have more money to invest or spend elsewhere. They are pay as little interest as possible, and reduce your outstanding mortgage balance as quickly as you can.