The mere mention of mortgaging your property can be a daunting task. When you do not have proper guidance, it can be a more exhausting process, too. Making a wrong decision can cost you a king’s ransom in your later life. However, it is easy to avoid those extra charges and mistakes associated with mortgages, if you look for the following details before signing your mortgage documents. These details hold good for even if you want to change your current active mortgage.
To begin with, it is necessary to have a clear picture of what mortgage is.
Well, a mortgage is an agreement to surrender a property to a creditor, as a security, till the borrower repays his loan. In other words, if a person has borrowed a loan to build a house or buy a property, the lender can seize the borrower’s property, if he fails to repay the loan. Simply put, it can be defined as the loan bought against a property under an agreement.
When a process involves a lot of money, it will indeed have a lot of rules too. It will make any common man confused once he decides to grasp all the rules and act upon it. It may also make a layperson commit some common mistakes that are bound to happen.
Nevertheless, these mistakes can be avoided by following some of these lookout points.
- Down Payment or No Down Payment?
In brief, a down payment can be defined as an initial amount paid to own the house in addition to the debt amount provided by a lender. Even if it is possible to get a house with no down payment in Canada, it is smarter to opt for a house with a down payment. It is an underrated, yet stronger financial instrument, which is a deciding factor for your future interest rates and instalments.
The down payment has its significance for two reasons. As discussed above, a down payment increases the sum of equity, thereby reducing the amount of money you may need to pay later. It also lowers the mortgage monthly payment significantly. Subsequently, it also places a great responsibility planted in the mind of the person taking a loan. Once when a big sum is made to pay for a down payment, the borrower will be aware of the responsibility to pay the timely monthly charges.
- Adjustable rates? Double Check!
The adjustable mortgage rates can look attractive in the beginning with lower and affordable rates. Before bouncing on the cheap adjustable rates at the very beginning, look out for your affordability at the later stages of life. The adjustable rates may help you own a house with an affordable mortgage rate. But that can be a mirage, as the rates tend to reset after some time. This makes the house owners take the equity of the home and refinance to a much lower rate.
- Reverse mortgage? Other costs may add up too.
A reverse mortgage is an income solution for senior citizens. As most people blindly opt for reverse mortgage facility, as a steady income against your equity of the house, it may also end up being escalated with other associated costs. The monthly or yearly income is given against the house equity. The equity is given out completely over a period of time or as a whole sum for every year.
As every lucrative scheme, this rule comes with its disadvantages. There are many charges involved in this scheme that include appraisal fees, lawyer fees, insurance and other charges. These costs eat up the income received from the equity. Therefore, with this reversal mortgage one will end up losing both the property and also the income paid for it in return. Once when the equity is given away, the bank or the lender will own your house completely.
- Longer Amortization Makes You Pay More!
A longer amortization may seem easy on a person who wants smaller part of the money to be paid as his monthly payment. This may benefit the borrower for helping him part a small sum as his monthly charge. Interestingly, this benefit does not stop only for the borrower. When a longer amortization period is involved, it makes the borrower pay interest for the longer period. As a result, the lender is benefitted more than the borrower with a longer period of amortization.
For example, in a 40-year long mortgage, the borrower will be paying interest for ten extra years than he or she might pay for a 30-year long mortgage.
- Liar Loans – A big No No!
Canadian people must be familiar with the term “liar loans”. When a borrower states a higher income rather his or her actual income to get a loan for buying a bigger house, it is called as a liar loan. This may end up as a major issue for the borrower when they realize that the loan cannot be repaid. Its final result is mostly a foreclosure or bankruptcy.
As can be seen, there are many a number of things to be considered before mortgaging a property. It is always safe to choose a trustworthy bank or lender. It is also necessary to dream for a house that you can actually afford and not the house that you wish you could afford. It is also advisable to go with a trusted realtor who knows the best mortgage rates and the most ethical mortgage companies so that you don’t end up with the short end of the stick.
All the best with your mortgaging!