Fundamentals of Mortgages

 Photo: Huffington Post

Photo: Huffington Post

As we grow older and become more interested in having a place to call our own, it is important to know exactly what you we committing to. Mortgages are very common, yet many are unaware of their complexities. CIBC defines a mortgage as, “a loan to a property owner, often to buy property, in which the borrower gives the lender a lien on the property to guarantee repayment. This means if the loan is not repaid, the lender can take possession of the property and sell it to collect the amount owing.” Though it may sound overwhelming, with proper preparation and commitment to making payments toward the loan, mortgages can be the key to owning your dream home.

To better understand the mortgage approval process, consider this home buyer’s situation. A fellow Glendonite is looking to buy a house after graduating. The house they want costs $400,000. However, they do not have that in savings. A bank can lend them the money as long as they can make a down payment of 20%. In this case, 20% of the total cost is $80,000. Keep in mind that the down payment percentage changes depending on the bank used by the home buyer.

The buyer must also agree to make monthly payments to cover the remaining $320,000 of the loan, in addition to interest fees. When choosing the interest rate, several options are available. For example, an “adjustable-rate mortgage” will change the rate over the duration of your mortgage. A “fixed rate loan”, on the other hand, will ensure that the interest rate stays the same over the entire time that the loan is being repayed. The fixed rate loan is more consistent, and will allow you to have the same budget every month.  

The lender will also research and evaluate the home buyer on various aspects to ensure that they will be able to make their monthly payments. For instance, a bank will look at their credit history to check if the home buyer generally pays their bills on time and have good credit standing. Another crucial aspect is the buyer’s income level, which indicates whether or not they make enough money to afford the property. If they fulfill these requirements, the Glendonite is likely to be approved for a mortgage. Banks must look into potential buyers’ financial history so as to prevent the unfortunate situation that requires the bank to repossess the house. This is also known as foreclosure, and the bank must sell it again to make their money back.

These fundamentals concepts should help you out when looking for a property. Mortgages are typically the biggest investment you’ll make in your life, so it is vital to fully understand the commitment you are making.