Are you thinking about buying a home before the holidays? The fall market is an excellent time to go house hunting before the cold weather arrives. There’s typically less competition than the spring market, but still a decent amount of inventory to choose from.
Whether you’re a first-time homebuyer or a seasoned home-buying pro, here are some key mortgage terms to know.
Amortization: Your mortgage amortization is the length of time it takes you to pay off your mortgage in full. For most mortgages the amortization period is 25 years, although some mortgages from non-federally regulated lenders come with mortgage amortizations as long as 35 years. You can shorten your amortization period and save on interest by making prepayments against your mortgage.
Term: Not to be confused with your mortgage amortization, your mortgage terms is the length of time you’re locked in with a specific lender. In Canada the most popular mortgage term is the five-year fixed rate, although you can choose shorter mortgage terms, such as one or two years. Most variable rate mortgages come with a five year mortgage term. Although your mortgage rate isn’t locked in, the difference between prime rate and your mortgage rate (known as the spread) is guaranteed.
Deposit: Your deposit is the sum of money you put down on a property when you’re making an offer. There’s no rule to how much you have to put down as a deposit. It all depends on the market you’re buying in. You want to make a large enough deposit to show the seller you’re interested, without tying up too much of your money if the deal hits a snag.
Down Payment: Your down payment is made on the closing date once the deal has been finalized and is firm. In Canada, you can put down as little as a 5 percent down payment on properties below $500,000. However, keep in mind that any down payment under20 percent on a property’s purchase price means you’ll be required to pay mortgage default insurance. This amount is added onto your total mortgage balance and can end up costing you a lot more interest over the life of your mortgage.
Pre-Qualification: If you’re only toying with the idea of buying a home, getting pre-qualified for a mortgage may make sense. When you’re pre-qualified, it gives you an idea about how much money the bank may be willing to lend you towards the purchase of a property. If you’re serious about buying a home, you may want to skip the pre-qualification and go straight to…
Pre-Approval: When you’re pre-approved for a mortgage, it gives you the confidence to make an offer on a property. The banks gives you confirmation in writing that you’re pre-approved to spend, say, $500,000, on a home. In order to be pre-approved for a mortgage, you’ll need to hand over more information about your finances, including income and down payment. If nothing materially chances (i.e. you don’t lose your job), you should have no problem getting fully approved for your mortgage once the deal finally closes.