While viewing properties and imagining furniture arrangements can be fun for first-time home-buyers, it’s equally (if not more) important to understand the financial nitty gritty of a mortgage. Here’s a look at five terms to boost your understanding of the mortgage process.
- Amortization period: This is the period over which the mortgage is paid off. In Canada, the amortization period is typically 25 years, although it can be shorter to reduce the total amount of interest paid. The amortization period may also impact your interest rate.
- Appraisal: For some mortgages, your lender will require that an approved appraiser determine the property’s value and make sure that it meets the lender’s requirements. To calculate the value, an appraiser may look at factors such as the property’s size and condition, comparative sales in the area and any upgrades to the property.
- Conventional mortgage: A conventional mortgage is a loan for up to 80 percent of the home’s purchase price. If a buyer needs to borrow more than 80 percent, it’s considered a high-ratio mortgage and would be subject to mortgage loan insurance. A jumbo mortgage is another type of mortgage for a larger amount than what most lenders like to lend. Some Canadian lenders consider a jumbo mortgage to be $600,000 and above, while others start at $1 million.
- Freehold: The owner of a freehold property owns all property rights associated with that land, but in a leasehold, the land is leased to the property owner for a specified time period. The issue of freehold vs. leasehold is somewhat common in B.C., because the Canada Constitution precludes Native Reserve lands from being “sold” except to the Crown. Leases may run 60-99 years and may then be renewed. Leasehold properties tend to be cheaper than freeholds but as the end of the lease approaches, they may not appreciate the way a freehold property would.
- Interest: Interest covers the cost of borrowing money. In the early years of paying off a mortgage, a larger portion of your monthly or biweekly monthly go towards interest, then over time they are applied to principal (see below). A few lenders offer interest-only mortgages, where you only pay interest each month and then make lump-sum payments towards principal.
- Principal: Principal is the amount you’re borrowing from your mortgage lender. For instance, if you were buying a $250,000 home and paying 20 percent down payment ($50,000), then you’d need to borrow the remaining $200,000 to cover the full cost of the house. Thus, your principal would be $200,000, although that might be higher if you’re rolling closing costs or other fees into your mortgage.