How Does a Mortgage Work?

If you're about to embark on the path of homeownership for the first time, you will need to familiarize yourself with mortgages and how they work. A mortgage can seem intimidating and overwhelming, but you will be ready to tackle the mortgage process with a bit of homework and the right enthusiastic professionals by your side.

What Is a Mortgage?

In simple terms, a mortgage is a loan that helps you buy a home or any other type of property. Typically, you would work with a mortgage broker or a lender directly to secure a mortgage. The lender could be a mortgage company, large bank, credit union or private lender. Lenders will let you know the maximum amount for a mortgage you may qualify for, what your estimated mortgage payments might be and the current interest rates.

For most people, buying a house will be the most significant investment of their lives, and most of us cannot afford to put down the total cost of a house. When you buy a home, you will typically be required to have a down payment of at least 5% of the total cost of the property. A mortgage grants you access to the rest of the money you need to purchase the home.

You pay back the loan by making mortgage payments. These payments will come straight out of your bank account regularly, depending on how frequently you have scheduled your payments. Depending on the terms of your mortgage and your financial situation, you can make your payments monthly, bi-weekly, accelerated bi-weekly, weekly, or accelerated weekly.

What Is a Mortgage Term?

A mortgage term is the length of time that your mortgage contract is in effect. Your mortgage contract will contain everything you need to know about your mortgage agreement, including your interest rate. A mortgage term can vary from just a few months to five years or longer. As the end of each term approaches, if you can not pay off the remaining balance of your mortgage, you must sign on to another term. It's common for homeowners to require multiple terms to pay off their mortgage.

The prearranged length of your mortgage term will have an impact on several factors related to your mortgage. These factors include your interest rate, type of interest (fixed or variable), penalties related to not meeting the requirements of your mortgage contract, and how soon you will need to renew your mortgage agreement.

How Is a Mortgage Amount Calculated?

The principal amount is the figure that you borrow from a lender to purchase a home. This amount will include the home's purchase price, excluding your down payment and the mortgage loan insurance (which is required if your down payment is less than 20% of the value of your home, or if your lender requires it for another reason).

How Are Mortgage Payments Calculated?

Several factors go into making up your monthly payments. These factors include:

The amortization period – The length of time it takes to pay a mortgage off in full. The longer the amortization period, the lower the payments but, the more interest you will pay. The standard amortization in Ontario is 25 years, and this is the maximum you can choose if you have less than a 20% down payment.

Interest rate – The interest you will pay to the lender for borrowing money. Your interest rate will depend on various considerations, such as the length of your mortgage, type of interest you choose, credit history, employment, and lender requirements.

Payment frequency - How often you are making your mortgage payments. Accelerated payments can save you thousands throughout your mortgage term compared to regular monthly payments.

Property taxes – Depending on the conditions of your mortgage agreements, you might pay property taxes with your mortgage payment, or you might pay them directly to your city/municipality.

How Do You Get A Mortgage?

The best place to start is by connecting with a licensed mortgage professional. You can contact a mortgage broker, or you can contact someone at your bank. Either way, you should not have to pay for their advice and services. The main difference between your bank and a mortgage broker is that the bank employee will offer you mortgage products from that bank only, while a mortgage broker will have a pool of lenders to work with, depending on your circumstances.

Book a call today with the dedicated and professional staff at WealthTrack to learn more about mortgages and how you can start the mortgage process today, so you can feel confident when you are ready to make that offer for the home you deserve!