April 19, 2023 | Buying
What are My Mortgage Options?
A mortgage is a loan that lenders (like banks or credit unions) give to people to pay for real estate. It sounds simple enough, but there are important factors that need to be considered, so you pick the right terms, rates, and conditions for your individual situation. Keep reading to understand the 4 main things to consider when buying a home and getting a mortgage.
1. Mortgage types
There are two main types of mortgages. The right mortgage for you will depend on your personal financial situation and goals. Your real estate agent can help you decide the best option.
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 lender the right to take your home if you default on your loan. The first lender gets paid first in cases of default and has the best chance of recovering all of its money. Therefore, subsequent mortgages usually come with a higher interest rate.
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2. Mortgage features
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.
3. Land transfer tax
Buyers in most areas will have to add Land Transfer Taxes to their closing costs. Land transfer taxes are a part of the process unless you live in Alberta, Saskatchewan, or rural Nova Scotia. These taxes, levied on properties that are changing hands, are the responsibility of the buyer. Depending on where you live, taxes can range from a half a per cent to two per cent of the total value of the property.
Many provinces have multi-tiered taxation systems that can sometimes be difficult to understand. Here’s the Ontario breakdown:
Up to $55,000 = .5 % of total property value
From $55,000 to $250,000 = 1 % of total property value
From $250,000 to $400,000 = 1.5 % of total property value
From $400,000+ = 2 % of total property value
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4. Making an offer
When it comes time to make an offer, your agent can provide current market information which will aid you in presenting your offer. Your agent will communicate the offer to the seller on your behalf. Sometimes there may be more than one offer on a property. Your agent will guide you through this process. Here are the common kinds of offers:
Firm Offer to Purchase
Usually preferred by the seller because it means that you are prepared to purchase the home without any conditions. If the offer is accepted, the home is yours.
Conditional Offer to Purchase
Usually means that you have placed one or more conditions on the purchase, such as “subject to home inspection”, “subject to financing”, or “subject to sale of buyer’s existing home”. The home cannot be sold until all the conditions are met.
Acceptance of Offer
Your Offer to Purchase will be presented at the earliest possible opportunity. The seller may accept the offer, reject it, or submit a counter-offer. The counter-offer could be in reference to any number of factors, including the closing date and/or the purchase price. The offers may sometimes go back and forth until both parties have agreed upon an offer or until one or the other ends the negotiations.
Don’t take a chance
Buying a property is one of life’s most significant events, and purchases. Without the right representation, the process can feel overwhelming and confusing. Partnering with an experienced team with local expertise makes all the difference. Your agent will carefully explain all your mortgage options and financial responsibilities in detail so you know exactly what to do. Start your buying plan with Team Rajpal today.
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