Types of Loans
While finding the financing package that best suits your needs can be a complicated process, your local BOWES GMAC Real Estate Sales Representative can help you find the financing method that works best for you.
Remember that financing options are affected by local and regional real estate and banking practices as well as federal law.
A pre-approved mortgage certificate is not a guarantee of being approved for the mortgage loan. Even if you have a pre-approved mortgage certificate, you must still meet your lender during the conditional offer period to get a final mortgage approval. To ensure that the process goes smoothly, make sure you bring:
- A copy of the property listing
- A copy of the signed Offer to Purchase
Your lender will update/verify your financial information, the property and other information required to complete the mortgage application. Your lender may require an appraisal and/or a survey. Title insurance may also be required. Your lender will also inform you on the various types of mortgages, terms, interest rates, amortization periods and payment schedules available.
Depending on your down payment, you may have a conventional or high-ratio mortgage.
A conventional mortgage is a mortgage loan that does not exceed 75% of the lending value of the property. The lending value is typically the lesser of the property’s purchase price and market value. Your down payment is at least 25% of the purchase price or market value.
If you contribute less than 25% of the home price as a down payment — and as little as 5% — you will need a high-ratio mortgage. This type of mortgage usually requires mortgage loan insurance, which is available from CMHC or a private company. Your lender may add the mortgage insurance premium to your mortgage or ask you to pay it in full upon closing.
Fixed, Variable or Adjustable Interest Rate
Mortgage interest rates are either fixed, variable or adjustable. A fixed rate is a locked-in rate that will not increase for the term of the mortgage. A variable rate fluctuates based on market conditions while the mortgage payment remains unchanged. With an adjustable rate, both the interest rate and the mortgage payment vary based on market conditions.
A closed mortgage may be a good choice if you'd like to have a fixed payment that will allow you to adjust your budget to your new lifestyle. However, closed mortgages are not flexible and there are often penalties or restrictive conditions attached to prepayments or additional lump sum payments. It may not be the best choice if you decide to move before the end of the term or if you want to benefit from a potential decrease of interest rates.
This type of mortgage is flexible and can usually be pre-paid by any lump sum or paid off at any time without penalty. An open mortgage can be a good choice if you plan to sell your home in the near future or to pre-pay with large lump sums. Most lenders will allow you to convert to a closed mortgage at any time, although you may have to pay a small fee.
Your lender will also inform you on the term options for the mortgage. This is the length of time that the agreed-upon mortgage contract conditions, including interest rate, will be fixed. It can vary from six months to ten years. Choosing a longer term (e.g.: five years) gives you the chance to plan ahead and protects you from interest rate increases while you adjust to homeownership. Weigh your options carefully and don't be afraid to ask your lender to work out the differences between a one, two, five-year term or longer term.
This is the amount of time over which the entire debt will be repaid. Most mortgages are amortized over 15, 20 or 25-year periods. The longer the amortization, the lower your scheduled mortgage payments, but the more interest you pay in the long run
A mortgage loan is often repaid in regular payments, either monthly, biweekly or weekly. Payment schedules that are more frequent can save some interest costs by reducing the outstanding principal balance more quickly than with monthly payments. The more payments you make in a year, the lower the overall interest you have to pay on your mortgage.
Keep in mind that mortgages may have important payment features that can save you money and let you be mortgage-free sooner.