Understanding the Different Types of Mortgages and Tips to Get Approved

Purchasing a home is a significant milestone in one’s life, and finding the right mortgage is an important part of the process. As a local REALTOR® in New Brunswick, I understand the importance of educating potential home-buyers about the various types of mortgages available and providing helpful tips to increase their chances of getting approved. In this blog, we will look into the different types of mortgages and offer valuable insights to help you navigate the mortgage approval process.

What is Mortgage?

When purchasing a home, it’s common to have a portion of the purchase price readily available, which is known as the down payment. However, to cover the remaining costs, many homebuyers seek financial assistance from a lender. This assistance comes in the form of a mortgage.

Essentially, a mortgage is a legal agreement between you and the lender, outlining the specific terms of your loan. The mortgage is secured against the property you are purchasing, such as a house or a condo. This means that if you fail to fulfill the obligations outlined in the mortgage contract, such as making timely payments and properly maintaining the property, the lender has the legal right to take possession of the property.

Unlike other types of loans, a mortgage differs in several ways:

• A mortgage is a secured loan, where the property acts as collateral for the loan. This provides the lender with a form of security.
• At the end of the mortgage term, it is common to have a remaining balance that needs to be paid off. Mortgages are typically repaid over an extended period of time, requiring multiple contract renewals until the entire balance is cleared.
• When applying for a mortgage, you will need to meet certain qualification criteria, which may include passing a stress test to ensure you can afford the mortgage payments.
• A down payment is a crucial component of obtaining a mortgage. It is the initial payment you make towards the purchase price of the property, and it is typically a percentage of the total amount.
• Breaking your mortgage contract before its term is completed may incur a penalty, which can vary depending on the terms of the agreement.
• Mortgages usually involve borrowing a substantial amount of money, often reaching hundreds of thousands of dollars.

When you’re in the process of getting a mortgage, it’s important to consider certain factors. Your lender or mortgage broker will present you with different options, and it’s crucial to understand these options and their features. This will help you choose a mortgage that best suits your specific needs.

Here are the key aspects to consider:

1. Mortgage Principal Amount: This refers to the total amount of money you borrow from the lender to purchase your home. It’s important to determine the appropriate principal amount based on your budget and affordability.
2. Amortization: Amortization refers to the length of time it will take to pay off your mortgage in full. It’s typically measured in years. Consider the impact of different amortization periods on your monthly mortgage payments and overall financial goals.
3. Payment Frequency: You have options when it comes to how frequently you make mortgage payments. Common options include monthly, bi-weekly, or accelerated payments. Choose a payment frequency that aligns with your financial situation and budget.

If your lender is a federally regulated bank, they are obligated to offer you products and services that are suitable for your circumstances and financial needs. They should inform you if a particular product or service isn’t appropriate for your situation. Take the time to provide a clear description of your financial situation to ensure you receive the most suitable mortgage product. Don’t hesitate to ask questions and seek clarification to fully understand the mortgage you currently have or the one you’re interested in.

• Fixed-Rate Mortgages

A fixed-rate mortgage is one of the most popular options among homebuyers. With this type of mortgage, the interest rate remains constant throughout the loan term. This provides stability and allows borrowers to plan their budget effectively. Fixed-rate mortgages are suitable for those who prefer predictable monthly payments and are planning to stay in their home for a longer period.

• Adjustable-Rate Mortgages (ARMs)

Unlike fixed-rate mortgages, adjustable-rate mortgages have interest rates that fluctuate over time. Typically, ARMs start with a fixed rate for an initial period, after which the rate adjusts periodically based on market conditions. ARMs are a good option for borrowers who anticipate a short-term stay in their home or those who believe that interest rates may decrease in the future.

• Conventional Mortgages

Conventional mortgages are not insured or guaranteed by the government. These mortgages typically require a higher down payment, usually around 20% of the home’s purchase price. While the down payment may be higher, conventional mortgages often offer more flexibility in terms of repayment options and may have lower overall costs compared to insured mortgages.

• Insured Mortgages

Insured mortgages are backed by the Canadian Mortgage and Housing Corporation (CMHC) or other approved mortgage insurers. These mortgages require a lower down payment, often as little as 5% of the home’s purchase price. However, they also come with additional costs, such as mortgage insurance premiums. Insured mortgages are a popular choice for first-time homebuyers or those with a smaller down payment.

• Improve your credit score

A good credit score is essential when applying for a mortgage. Pay your bills on time, reduce your debts, and avoid new credit applications before applying for a mortgage.

Check out this helpful blog about CREDIT SCORES: WHY THEY MATTER AND HOW TO BUILD YOURS SMARTLY

• Save for a down payment

A larger down payment can improve your chances of mortgage approval and may also help you secure a better interest rate. Start saving early and explore assistance programs or grants available for homebuyers.

• Maintain stable employment and income

Lenders prefer borrowers with stable employment and a reliable source of income. Avoid changing jobs before applying for a mortgage and ensure you have documentation to support your income.

• Reduce your debt-to-income ratio

Lenders evaluate your debt-to-income ratio, which compares your monthly debt payments to your gross monthly income. Lowering your debt or increasing your income can improve this ratio and increase your chances of approval.

• Get pre-approved

Before house hunting, get pre-approved for a mortgage. This will give you a clear understanding of your budget and make you a more attractive buyer to sellers.

• Work with a knowledgeable mortgage professional

A local mortgage professional can guide you through the mortgage process, answer your questions, and help you find the best mortgage options based on your financial situation.

Knowing the nature of mortgages and their unique characteristics is essential when navigating the process of homeownership. Same goes with understanding the different types of mortgages available and implementing strategies to increase your chances of mortgage approval. By familiarizing yourself with the options and following the tips outlined in this blog, you’ll be better prepared to make the best decisions and achieve your homeownership goals. Remember, it’s always a wise choice to seek professional advice when navigating the mortgage landscape. If you have any questions, feel free to ask me!