Like anywhere, the world of Calgary mortgages can be complex and confusing to the initiated. And things can get overwhelming very quickly even before you start your application process. To get you started, let’s take a look at some basic terms you’ll encounter when looking at Calgary mortgage rates.
When you are pre-approved for a loan, your mortgage lender gives you a document indicating the amount he is willing to lend you and its corresponding terms. This pre-approval process involves submitting your financial information, on which the lender’s terms are based. Being pre-approved does not guarantee a loan, but it gives homebuyers an estimate of how much they will afford when house hunting.
Principal and Interest
Principal refers to the amount loaned out to you at the beginning of the contract. More or less, this equals the house’s purchase price minus your down payment.
Of course, borrowing money comes with a price—that’s where interest comes in. Interest is usually indicated as a percentage, and can be broadly categorized as either fixed or adjustable. A word to the wise: the lowest interest rate doesn’t always give you the best deal.
With an adjustable-rate mortgage, your interest rate fluctuates along with the lender’s prime rate. Hence, your rate is usually calculated as the prime rate plus a certain percentage that represents the lender’s premium.
Adjustable-rate mortgages usually end up being the more affordable choice when compared to fixed rates. However, while an adjustable rate may seem attractive, it also bears a higher level of risk. Particularly, be prepared to adjust your monthly budget to complement the market’s changing rates.
A variable-rate mortgage is essentially similar to an adjustable-rate mortgage, but monthly payments remain fixed despite the fluctuating interest rates. In exchange, your amortization period can increase or decrease, whereas it remains fixed with an adjustable rate.
With a fixed-rate mortgage, you know the exact terms of your mortgage upon closing the deal. This type of mortgage is relatively less risky and is usually recommended to first-time homebuyers. However, it tends to be more expensive because of its higher interest rate.
If you’re unsure about whether to take a fixed, variable, or adjustable rate, hybrid mortgage rates are now commonly available. Such mortgages combine features of the two primary types of mortgage: for a number of years, your rate is fixed, but it transforms into an adjustable rate thereafter.
Payment frequency and Amortization period
Traditional mortgages involve monthly payments, but payment frequencies can go beyond 12 a year. Borrowers have the option of doing weekly, bi-weekly, or semi-monthly payments, which, when compared to monthly payments, allows individuals to pay off their mortgage in a shorter span of time (i.e., to shorten your loan’s amortization period). Another way to shorten your amortization period is to have larger payments.
Reducing your total interest expenses can be rewarding, but before you decide to sign up for these options, make sure your monthly budget can handle these expenses.
Pre-payment and Refinancing
Pre-payment and refinancing share the same goal as shortening your amortization period: to minimize your total interest cost. However, these are privileges bound to terms that vary with each lender. For example, a closed type of mortgage penalizes the borrower who makes pre-payments before his mortgage reaches maturity.
Refinancing refers to paying your current mortgage and obtaining or renegotiating a new one before the current mortgage matures. Borrowers choose to refinance for a number of reasons, but the more common ones are to consolidate existing debt or to take advantage of the market’s lower interest rates.
Mortgage Default Insurance
Lenders usually require insurance to homebuyers who plan on taking high-ratio mortgages (mortgages in which less than 20% down payment is paid). Mortgage default insurance serves to protect the lender in case the borrower defaults. To avail of insurance, the mortgage lender pays an insurance premium, but the cost is usually passed on to the borrower.
In Calgary, the more common default insurers include Canadian Mortgage and Housing Corporation (CMHC), Genworth Canada, and Canada Guaranty.