Christian finance and consumer credit counseling & debt management
Before You Apply for a Mortgage
Types of Mortgages
Fixed-Rate (Closed) Mortgage
With a fixed-rate mortgage you benefit from the security of locking in your mortgage interest rate for a predetermined length of time, usually ranging from six months to five years. Other terms such as three months, or six, seven and 10 years are also available.
If you think interest rates will increase, you may want to choose a longer term, such as a five-year term. If you think that rates are going to decrease or remain relatively stable for a long period of time, you may want to choose a shorter term.
Most lenders will allow you to make additional payments on your mortgage without any penalty. These could amount to as much as 25 per cent of your original mortgage amount (depending on the institution). However, if you want to pay more than the annual allowable maximum, or pay off the entire mortgage at any time, you will generally have to pay a penalty. Make sure you understand this before choosing your term.
Open Mortgage
An open mortgage allows you to pay off part of your mortgage, or the entire mortgage, at any time without any penalty. Open mortgages usually have a short term, ranging from six months to one year. The interest rate is usually higher than the fixed rate for a closed mortgage with a similar term. One situation where an open mortgage may be appropriate is if your house is for sale and you want to repay the financial institution with the money you get from the sale.
Variable Interest Rate Mortgage
At the start of a variable interest-rate mortgage, the lender will calculate a mortgage payment that includes both the principal and interest. During the term of the mortgage, your payments usually do not change. However, as the base rate for the variable interest-rate mortgage changes, so will the interest rate on your mortgage.
If interest rates drop, less of each payment will go towards paying interest and more will go towards paying off the principal. If interest rates rise, more of your payment will go towards paying interest and less will go to reducing the principal.
Some variable-rate mortgages are completely open (you can pay off all or part of your mortgage at any time, without a penalty). Others may be closed and charge a penalty for paying off all or part of the mortgage.
Convertibility Feature
A mortgage with a convertible feature allows you to renegotiate your interest rate (renew it early) before the maturity date. However, not all lending institutions offer a convertibility feature. With a convertible rate mortgage, you can lock into a longer term during the current term of your mortgage without paying a penalty – but only if you stay with the same lender. For example, if after a couple of months you see that interest rates are going to increase, you may change to a longer-term mortgage such as a five-year term. The convertibility feature is often on variable interest-rate mortgages or fixed-rate mortgages with short terms.
Adjustable Rate Mortgage
An adjustable-rate mortgage is a mortgage where the interest rate and payment amount are adjustable from time to time during the term.
Down Payment
The down payment is the amount of money that you pay upfront towards the purchase of your home. You should have a good idea of how much you can put towards the down payment before talking to a potential lender or broker.
The minimum down payment for the purchase of a home depends on many factors (geographic location, the type of house, its cost, etc). Normally, the minimum down payment required for the purchase of a single home or condominium is five per cent of the accepted purchase price (or appraised value, whichever is lower). Usually, for the purchase of a 2-unit home (duplex), the minimum down payment is 7.5 per cent, and for a 3-unit home (triplex) or 4-unit home, 10 per cent. However, the less you need to borrow, the less interest you will have to pay.
If your down payment is less than 25 per cent, your mortgage is considered a "high-ratio" mortgage. In this case, the mortgage lender must, by law, require you to purchase mortgage loan insurance (or "default insurance"). If your down payment is 25 per cent or more, your mortgage is considered a "conventional" mortgage and does not, by law, have to be insured. However, a lending institution may still require mortgage default insurance for a high-risk loan, despite the fact that the law does not require it.
Normally, the down payment you make must come from your own funds. If you borrow the money (such as on a line of credit, personal loan or credit card), a higher mortgage loan insurance premium applies.
Credit Rating
When you apply for a mortgage, the lender checks to see whether it should lend you the money, and under what conditions.
The lender will ask your permission to obtain a copy of your credit bureau report. This report shows your previous and current credit rating and indicates how well (or not) you handle credit. If you do not handle credit well, you may be charged a higher rate, or your application may be denied depending on the financial institution.
If you consistently make late payments, or if you do not pay your bills at all, the lender could refuse your mortgage application. Some lenders may still consider your application if you have a large down payment and an acceptable co-signer.
If you have previously declared bankruptcy, this will show up on your credit bureau record for a minimum of six years after your discharge. While some lenders will not consider your request if a Discharge of Bankruptcy is recorded on your credit bureau report, others may consider the request based on your current circumstances and amount of down payment.
How can you get more information about your credit report?
You should request a copy of your credit file at least once a year. This is also important before you apply for a mortgage, to make sure that there are no mistakes on your credit report. This service is usually provided free of charge.
Special Options and Coercive Tied Selling (forced purchases)
When you buy a house, you may be shopping around for more than one financial product. In addition to a mortgage, you may be looking for house insurance, life or disability insurance, a line of credit, etc.
Most financial institutions can offer products and services to complement your mortgage. Some lenders may even offer you better conditions on your mortgage if you take mortgage life insurance through them, or if you transfer your investment portfolio to them. Although such offers may seem interesting, it is a good idea to get quotes from other providers of these services and products, to ensure you get the best deal.
Remember that if you renew your mortgage or transfer your mortgage to another financial institution, the special options (e.g., your life/disability insurance) will not automatically be renewed or transferred with the mortgage. You might have to re-apply for these options.
Join a club. Search through the categories
above for a club that matches your interests. Click on that club
name, then on the "join" link in the upper-right-hand side of the
page. More help.
Create a club. Find a category that matches your club, then click on "Create a Club" in the upper-right-hand side of the page. More help.
