If you’re a homeowner, you may be trying to pay your mortgage down faster. Here, we cover some of your options, and what you should consider.
Talking a bit more about mortgage terms.
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Being familiar with mortgage terms opens you up to more opportunities and allows you to feel more comfortable with homeownership. In this post, we talk about a few important mortgage terms that we receive a number of questions on.
The first of our mortgage terms is the mortgage pre-approval. A mortgage pre-approval is an important step a homebuyer can make before house hunting. It is when the lender indicates, formally, how much a house hunter qualifies for. A lender assesses a borrower’s finances, like credit score and debt-to-income, to determine how much they can qualify for. This gives you an idea of your budget so that you can shop within your means. Moreover, it shows sellers that a person with a pre-approval is a serious buyer. A seller is more likely to accept an offer from someone who has been pre-approved for a mortgage since they have already qualified to obtain a loan of that amount.
The interest rate is the percentage being paid to borrow the funds. This is the cost a borrower must pay in order to borrow the money from the lender. Your interest payment is wrapped into your monthly mortgage payment. This payment includes the interest outstanding for the month as well as a payment towards the principal balance. The interest rate is determined by a number of factors. Your financial situation, like your credit score, can play a part in the interest rate you receive. There are also economic factors that help determine the interest rate.
Since interest rates vary depending on the lender, the borrower can choose to lock in a rate with a pre-approval. This rate hold will last for up to 120 days and helps to protect you from rate changes. Locking in an interest rate can be advantageous to a borrower if interest rates are fluctuating. It is important to note that if rates go down further, you can receive a lower rate than the amount quoted on your rate hold. Locking in a rate protects you in the event rates rise.
We talk a lot about the value of equity in your home. Put simply, this is the total value of the property, less the amount you owe on your mortgage. By regularly making mortgage payments, you will increase the equity you have in your home. Similarly, if the market value of your property increases, your equity will also increase. When we talk about refinancing your mortgage, the amount of equity you have in your home will be an important factor in the process.
The principal balance of your loan is the actual amount you are borrowing. This is the amount that you have to pay back, along with the interest on the principal amount. So, each month you are paying down some of the principal balance as well as interest on the amount outstanding. As you pay down the principal balance, your equity in the property will grow. Your equity in the property grows as you pay down the principal balance. An extra payment each year, or bi-weekly payments, can help pay down the mortgage faster. This allows borrowers to make bigger payments on the principal of the mortgage and pay less in interest.
Mortgage insurance is mandatory insurance that some borrowers are required to purchase. Borrowers with a down payment of less than 20% must purchase mortgage default insurance to be approved for the loan. The insurance protects the lender in the event that a borrower defaults on their mortgage payments. Without mortgage default insurance, many Canadians would not be able to afford to buy a home. It allows Canadians with less than a 20% down payment to access the housing market and purchase their first home. Mortgage insurance also helps keep interest rates low for all Canadians. Mortgage insurance lowers the risk of lending funds. Therefore, protecting lenders if you default on your mortgage and providing you with options if you cannot afford a 20% downpayment.
Knowing some of the important mortgage terms will help you feel more confident about homeownership. This can open up more opportunities to you, as a borrower, by being more confident and knowing a little more about homeownership. Knowing more stuff about stuff makes you a more attractive person and fosters deeper conversations. When looking to learn more about the mortgage market, give us a call at Clinton Wilkins Mortgage Team! You can reach us at 902-482-2770 or get in touch with us here!