There are a few different types of mortgages and how the interest on those mortgages is structured. A brief summary of your options and how they what effect each one has on your payments and terms are described below.
|· Conventional Mortgage||When you provide at least 20% down payment.|
|· High Ratio Mortgage||When you provide less than 20% down payment.|
|· Fixed Rate Mortgage||When you lock in your interest rate for a set term.|
|· Variable Rate Mortgage||When your interest rate fluctuates for a set term.|
|· Insured vs. Insurable vs. Uninsurable||How the risk of defaulting on the mortgage is addressed.|
As a professional mortgage broker, structuring your mortgage terms to best suit your financial needs is a priority for me. Every mortgage application is unique and I can find the lender that wants your business on your terms.
A conventional mortgage is a loan for no more than 80% of the purchase price (or appraised value) of the property. The remaining amount required for a purchase (20%) comes from your resources and is referred to as the down payment. A bank or lender will offer you a conventional mortgage if you have 20% or more to put down on the property. With this type of mortgage you are not required to purchase CMHC insurance, thus lowering your monthly payments.
Example: If you’re buying a house in Langley for $350,000 then you’ll need a $70,000 down payment to qualify for a conventional mortgage.
High Ratio (aka: High Loan-to-Value Mortgage)
This type of mortgage allows you to borrow more than 80% of the property’s purchase price (or the appraised value, whichever is less). However, to take advantage of this option you will need to pay for mortgage loan default insurance. This insurance is actually legally required by your lender, but the lender passes on the cost to you.
The more you put toward your down payment, the less you’ll be charged. Calculating your particular mortgage default insurance can be done using the following figures:
- 5% – 9.99% down payment: 4.00%
- 10% – 14.99% down payment: 3.10%
- 15% – 19.99% down payment: 2.80%
Example: If you’re putting a 10% down payment on a $600,000 home purchase ($60,000), you’ll have a mortgage of $540,000. Based on a 3.10% mortgage default insurance rate (since you fall within the 10% – 14.99% category), your insurance premium would be $16,740 ($540,000 x 3.10%). This amount would then be added to your mortgage amount, which means you’d have a total mortgage amount of $556,740. Mortgage default insurance is repaid over the life of the mortgage.
Fixed Rate Mortgage
A fixed mortgage offers you the security of locking in your interest rate for the term of your mortgage, so you know exactly how much principal and interest you will be paying on the mortgage during the term. Terms range from 6 months to 10 years. The benefit of this mortgage is the rate is lower than an open mortgage, making it a more popular option if you have no plans to pre-pay it in full during the term you select.
Example: Fixed rate mortgages offer some form of pre-payment, from 10% to 25% of the original mortgage balance each year, depending on the lender. If you wish to pay off your mortgage in full, there will be a penalty of either 3 months simple interest, or an Interest Rate Differential (IRD).
Variable Rate Mortgage
A variable-rate mortgage allows you to take advantage of today’s low Prime Rate. Most variable rate products are set below prime, terms range from 1 to 5 years. Payments vary depending on the product or lender you choose. In some cases you can fix your payments for up to 5 years, but the interest rate will fluctuate as the Bank Prime Rate changes. In other cases your monthly payments will fluctuate depending on how many times the Prime Rate changes during your term.
Example: Even though this option usually provides for a lower interest rate overall, borrowers must have the cash flow to handle a fluctuating payment.
Insured vs. Insurable vs. Uninsurable
These terms will come up again and again, and it’s important to understand which category you belong to.
The mortgage lender is protected from the applicant defaulting on the mortgage because the applicant pays for insurance as part of the lending terms.
Example: High Ratio mortgages are legally required to be insured and that cost is passed on to the applicant. The insurance and mortgage are bundled into one larger payment.
The mortgage is “stress tested” at a higher amount than the borrower would be paying to ensure borrowers can afford their mortgage if the rates raise.
Example: Lenders may choose to pay for mortgage default insurance on mortgages where the borrower has more than 20% down payment. This insurance protects the lenders from a loss.
Uninsurable Mortgages include:
- Refinancing (you want to pull some of the equity out of your property)
- Mortgage on rental properties
- Mortgages approved at 30 years amortization
- Properties worth over a $1 million
The Government is intentionally passing on the risk to lenders by implementing stricter insurance qualifying guidelines and limiting mortgages that can be insured to what they consider lower risk.
For more information on Langley mortgages please contact Jaret today at 604-816-5988
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