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What is a mortgage?

what is a first mortgage

For most people, buying a home means taking out a mortgage. That means you borrow money to buy a home, using that home as collateral for the loan. Financial institutions—banks, trust companies. insurance companies. credit unions, caisses populaires, finance companies and pension funds— lend money for mortgages.

Private individuals also lend money for mortgages. Private lenders often advertise in the classified advertising section of newspapers.

Mortgage brokers usually do not lend money. They find a lender for you. They may charge a fee, but usually the fee is paid by the lender.

Mortgage payments are blended payments. This means that the payment includes the principal— the amount borrowed—plus the interest—the charge for borrowing the money.

You repay the mortgage in regular payments. You can make payments once a month, once every two weeks, or once a week. Most people make monthly payments. The payments are usually level—the same every month.

The payments may also include the property taxes, which the company collecting the payments forwards to the municipality on your behalf.

A conventional mortgage is for an amount that does not exceed 75 per cent of the appraised value of the property or the purchase price, whichever is lower. Your down payment is a minimum of 25 per cent of the purchase price. With a high-ratio mortgage you pay less than 25 per cent of the cost of the home as a down payment. You can pay as little as five per cent of the cost of the home as a down payment.

The lender needs mortgage loan insurance with a high-ratio mortgage. It protects the lender and, by law, most Canadian lending institutions are required to have it. They will usually pass their costs on to you by adding them to your mortgage principal amount.

Having mortgage loan insurance means that if you, the borrower, default on your mortgage the lender is paid back by the insurer. With the risk of losing their money removed, lenders have the confidence to make mortgage loans of up to 95 per cent of the purchase price of your home.

Mortgage loan insurance is not the same as mortgage life insurance. Mortgage loan insurance assures the lender of repayment if you default. Without mortgage loan insurance the lender would not make a high-ratio loan. Mortgage life insurance pays off your mortgage in full if you or your

spouse dies.

You might take over the seller’s mortgage—called assuming an existing mortgage —as part of the price you pay for the house.

Assuming an existing mortgage saves you money on the usual mortgage arrangement costs, such as appraisal and lawyer fees. You don’t have to arrange financing from another lender and the interest rate on an existing mortgage may be lower than the prevailing market rate.

A vendor take back (VTB) mortgage means that the person who sells you the house lends you the money to buy the house. The seller may offer the VTB at less than bank rates. Some sellers will sell the mortgage to a third party rather than holding it.

A second mortgage is a mortgage loan for money in addition to the money owed under a first mortgage. A second mortgage has a higher interest rate than a first mortgage. It also has shorter amortization— the period over which a loan is repaid. Homeowners often use a second mortgage to pay for renovations. Once you have looked at all the options and chosen a lender, the paperwork starts.

Although it usually only takes a few days to get approval for a mortgage, give yourself plenty of time. When you put in your offer to purchase, this is almost always on the condition of getting mortgage approval.

Some first-time buyers get pre-approval. They submit their financial paperwork to a potential lender and receive approval for a pre-determined mortgage amount. The pre-approval agreement may also guarantee an interest rate for a mortgage taken out during the 60- to 90-day pre-approval term.

Mortgage approval paperwork satisfies the lender that you are able to pay back the mortgage without defaulting.

The lender wants to know such things as your marital status, number of dependents, age, current employment, salary, how long you have worked there, and whether you have any other sources of income. Lenders also do a credit check to find out if you pay your bills on time.

The lender will ask for a list of your assets (such as vehicles) and liabilities (such as credit card balances and car loans).

If you have additional questions or would like to see if you can prequalify for a mortgage in Ottawa, you can use our Ottawa Mortgages Directory to find a mortgage broker or mortgage bank specialist to help you.

Category: Credit

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