Valuable Mortgage Information for Every Borrower

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Although every mortgage application is a little different, there are many standard elements to the mortgage process that a first-time home buyer will find extremely valuable during the process of getting a new home. A mortgage and home are two of the costliest investments a family will make in their lifetime, so it’s important to have all the information necessary to make good decisions during the application.

The Down Payment

A down payment isn’t just the amount that someone has saved up in the bank for his home purchase. There are a few different things to consider about a down payment, with a 20% down payment being the only constant. The Canadian government recently made some changes to the way it interacts with mortgage insurance, and this has made 20% the mandatory down payment amount.

 Valuable Mortgage Information for Every Borrower
Some families do consider obtaining a loan from their Registered Retirement Savings Plan for a down payment, which has the effect of paying one’s own self back in interest instead of a bank for the down payment, and this might be a preferred method for anyone who has saved up a significant amount in their Plan. Some financial advisors suggest that saving up a down payment outside of one’s RRSP is the better way to go when purchasing a home.

Principal and Interest

There are two numbers at work within a mortgage with one number being the “principal” amount, which is the original amount borrowed, and the “interest” amount, which is the cost of the mortgage that accumulates and is paid off over time alongside the principal. Many new mortgage holders are surprised that nearly all of the money paid during the first year of the mortgage goes to interest, instead of to the principal.

Tip: A home owner may make one extra payment each year where the entire payment amount feeds into the principal balance. This option is highly recommended for reducing the overall length of time a family pays on the mortgage. Reducing the principal is always the priority in mortgage payments.

RRSP Valuable Mortgage Information for Every Borrower
Choosing a Mortgage Type

There’s more than one type of mortgage, and each type will impact a family differently as far as payments and timelines are concerned. The two main types of mortgages are:

1. Open Mortgage

This type of mortgage allows a person or family to make payments at any time on the mortgage, and if finances allow it, the mortgage may be paid off in its entirety before the end of the term. Paying off the mortgage early incurs no penalty or extra fee. The only drawback to such a mortgage type is that the interest rate is higher than a closed mortgage.

2. Closed Mortgage

A closed mortgage often does not allow extra or prepayments without charging a penalty. Each lender is different as far as the fees they charge, so it’s important to investigate different banks to see how much they charge. The advantage over an open mortgage is that the interest rate is lower for a closed mortgage, although it does make paying the balance back faster a little more difficult. Use this mortgage penalty calculator to calculate different penalty options.

Money Valuable Mortgage Information for Every Borrower
Payment Frequency

Unlike credit cards, there are a few methods available for paying off a mortgage as far as the timing of payments is concerned. A mortgage payment may be made every two weeks (generally called “biweekly”) or once a month (appropriately called “monthly”). The advantage of paying on a biweekly (twice monthly) basis is that greater progress will be made on the interest of the loan, and so the overall balance will go down much more quickly.

Melissa Wood contributes as an editor at RateSupermarket.ca. Obsessed with finding small ways to save money every day, she enjoys sharing her frugal lifestyle to the MoneyWise Blog. Read more about Melissa on her Google+ page.

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