MORTGAGE REFRESHER

Feeling a little rusty when it comes to mortgages? If it’s been a while since you’ve been through the homebuying process, you’ll find a refresher of mortgage terminology and features below:

WHAT IS A MORTGAGE?

A mortgage is a loan that helps you buy and take possession of a home or property before you can afford to do so on your own. Mortgages come in many forms, but they all typically include a down payment and regular payments – monthly, biweekly or semi-monthly. Most commonly, the mortgage loan is repaid in monthly payments, which go towards both the principal amount borrowed and the interest on the loan.

INTEREST RATES

The interest rate is the cost of borrowing expressed as a percentage of a loan balance. The interest is paid monthly, along with your principal payment, until your mortgage is paid off. To view Northern’s current mortgage interest rates, click here.

FIXED VS VARIABLE RATES

With a fixed rate, your monthly mortgage payments will stay the same throughout the term of your mortgage. Whereas with a variable rate, your monthly mortgage payments change as interest rates fluctuate. Historically, variable rates are lower because they involve less risk for the lender, but fixed rates provide the security and stability of locking in at a rate and payment you know you can afford.

AMORTIZATION

The amortization is the total amount of time required to completely pay off mortgage debt, if all payments are made on time and the terms of the mortgage stay the same. Typical amortization periods are set at 25 years, but they can be more or less if you choose.

MORTGAGE TERM

This is the length of time you commit to an interest rate with a specific lender. For example, you might commit to a 5-year mortgage at a specific interest rate. In that case, your term would be the next 5 years of your amortization period and a new rate would be negotiated.

OPEN VS CLOSED

Open mortgages allow you to pay your loan off in full at any time, while closed only permit limited pre-payments and will charge you a penalty if you repay your closed mortgage in full or exceed the limited pre-payment options before the end of its term.

CONVENTIONAL VS HIGH-RATIO MORTGAGES

Your mortgage is considered a Conventional Mortgage when your down payment is 20% or more of the purchase price of your home. If your payment is less than 20%, it would be deemed a High-Ratio Mortgage and you’d be required to purchase Mortgage Default Insurance.

WHAT IS A MORTGAGE STRESS TEST?

A mortgage stress test is designed to ensure that you will be able to keep up your mortgage payments if interest rates should rise. In 2017, the federal government made it mandatory for anyone applying for or renewing a home loan. But don’t worry – you don’t need to study for it. It’s less of a test and more of a set of rules that lending institutions must follow.

If you have any other mortgage questions, we’re here to answer them. Just book an appointment with a Northern Mortgage Expert online.