Understanding A Mortgage

Buying that brick and mortar structure is often one of the biggest decisions you’ll ever make. Between the first house shopping trip to the last signature on the bill of sale, it’s a decision that will keep you hopping from day one. And after the papers are signed, it’s time for a whole new pile of paperwork: your mortgage. After the house search, understanding a mortgage is a daunting task, but a necessary task for almost every homeowner.

What is a mortgage?
Before the Great Depression in the 1930s, if someone wanted to purchase a home in Canada, cash would exchange hands and the new owner would sign on the dotted line. After the Depression, however, things weren’t that simple – the money wasn’t immediately available anymore. Thus, the creation of the modern mortgage came to be.

Quite simply, a mortgage is a document that states that the proud new owner of a house (mortgagor) now owes a specific amount of money to the financial institution or mortgage broker (mortgagee) that is financing the purchase.

A person (or persons) purchasing a home will have certain options when entering into a mortgage, all of which the mortgagor will explain. The main factors that will affect the mortgagor the most in a mortgage are: Mortgage Payments and Amortization.

• Mortgage Payments are the monthly, bi-weekly or weekly payments that the mortgagee will be making throughout the life of the mortgage. The mortgagor has the option of the frequency of payments depending on what is the most affordable payment schedule. The mortgage payments are determined by the amount of the down payment, the length of the amortization, the current mortgage rates and the frequency of the payments.
  
  The payments are made up of two areas. The first is principal, which is the portion of the payment that is directly applied to mortgaged amount. The second is the interest which is directly based on current mortgage rates. The mortgagor also has the option of purchasing insurance which would be included in the payments as well.
• The Amortization of a mortgage is the length of time the mortgagor has agreed upon for the repayment of the mortgage. A usual amortization is 25-30 years in this economy but can be repaid in as little as 5 years as well.

Why Have a Mortgage?
First time home buyers may wonder, “What have I gotten myself into?” The reality of a mortgage is a huge, long-term debt to many people. But there is another, extremely important reality: home equity. Home equity is the amount of money you have paid off on your mortgage. This equity is in fact credit that allows home owners to borrow money in the future, secure loans, refinance and much more. Home equity is somewhat like an insurance policy for a homeowner; security for the future.

Mortgage Terms

Amortization: the length of time over which the mortgage is to pre paid.

Closing Date: The date on which the sale of the house becomes final.

Maturity Date: The final day of the mortgage term.

Mortgage Rates: the interest rates that the mortgagor is being charged on outstanding loan balances.

Mortgage Term: The length of time that an interest rate is guaranteed.