April 30, 2009
Uncategorized
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I have been quite fortunate in my business to work with many first time home buyers and am happy to take the time to explain all parts of the mortgage process and all mortgage terminology.
Invariably we always get to the topic of amortization and amortization period.
For those of you who do not know what amortization is the Alberta Mortgage Brokers Association (AMBA) uses this definition:
“The gradual retirement of a debt by means of partial payments of the principal at regular intervals…
The Amortization Period is a time of arrangement for paying off a mortgage by equal installments or periodic constant payments.”
The Amortization Period has a huge effect on the size of the borrower’s monthly payment. This, in turn, effects how much home they may qualify for. It stands to reason that if you borrow $100,000 and you decide to pay it off in 10 years that your monthly payments will be bigger ($1,005) than if you decide to pay it down in 20 years ($598).
Sometimes the “standard” Amortization Period of 25 years does not allow a couple to purchase the home that they really want. So I present them with the idea of extending the Amortization Period to the maximum – 35 years. This allows them to qualify for more and in turn get the property they want.
But it is really important for people to understand that there are two draw backs for extending the Amortizaton Period:
- If their down payment is less than 20% and they decide to extend the Amortization Period then the Mortgage Insurance fee will be increased by0.4%. On a $100,000 mortgage their fee would increase by $400.
- By extending the Amortization Period people will be paying more in interest payments over the course of their mortgage. On a $100,000 mortgage with a 25 year Amortization Period the total interest paid is $56,022 but on the same amount with a 35 year Amortization Period the interest paid is $82,426.
As long as the borrowers know that taking this action will effect how much they will pay and decide that they are ok with this then we will move forward with the 35 year Amortization Period.
In future blog posts I will reveal some strategies for paying down your mortgage faster thereby reducing the overall interest payments and negating some of the effect of extending the Amortization Period.
Call if you have any questions.
April 23, 2009
Case Study, First Time Home Buyer
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One of the common questions I get when working with my customers is “What is the difference between open or closed mortgages?”
These terms are thrown around alot and people sometimes are confused about them. I am not suggesting that the terms or what they describe are complex – just that people are not always aware.
Open mortgages are mortgages that can be paid off at any time without a penalty. The can either be for a set amount or can have floating balances (like a credit card). The two most common reasons a person would want an open mortgage is if they knew that they were about to come into some big money and wanted to apply it to the mortgage – like the sale of a house, a big bonus from work or winning the lotto. They may also have their mortgage as open if they have a line of credit that is secured against their property.
Closed mortgages are mortgages that if paid off before their allotted term incur a penalty. So for example if you were to win the lotto and pay off your house the next day then you would incur a penalty. Or in a more likely situation if you were to refinance before the term of that mortgage was up then you would likely pay a penalty.
So by the definitions – many people say, “lets go with the open option just in case”. Lenders want to encourage people to go with fixed terms so they increase the rates on open mortgages or reduce the number of terms that are available to use this product (for example 6 months and one yr instead of 1 yr, 2 yr, 3 yr, 4 yr, 5 yr, 7 yr and 10 yr that fixed mortgages offer).
I always suggest to my customers that if they are not expecting a large sum of money in the next 12 months but still want to make extra payments to pay down their mortgage faster then take advantage of the pre payment privileges that most lenders offer.
I will discuss those options further in a future blog post.
All the best and please feel free to call if you have any questions.
April 14, 2009
First Time Home Buyer, List
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They are:
- Legal Fees,
- Land Titles Disbursements,
- Property Tax Adjustments,
- Real Property Reports,
- Fire Insurance, and
- Interest Adjustment Date.
LEGAL FEES
Your realtor or mortgage broker will refer you to a lawyer that they trust and who is familiar with real estate law. Legal fees will vary from lawyer to lawyer. Typically they range from $800 to $1,200.
LAND TITLES DISBURSEMENTS
Land titles disbursements remain constant.
Below is an example of these disbursements.
- Mortgage registration – $1 per $5,000 plus $15. This charge is based upon the amount of the mortgage. For example a purchase of $150,000 with a mortgage of $100,000 the fee would be $35.
- Title Transfer – $1 per $5000 plus $35 & $9. This charge is based upon the purchase price. For example a purchase of $150,000 the fee would be $74.
- Tax Certificate from the city of Calgary – $12.75
- Land Titles search and City of Calgary Search – $15 – $30
- Couriers – range from $30 – $60
- Photocopying, postage and faxing – $30
Add your lawyer’s legal fees to the disbursements to determine your entire legal bill.
REAL PROPERTY REPORT
A Real Property Report is a legal document that clearly illustrates the location of significant visible improvements relative to property boundaries.
Your mortgage lender will always require a Real Property Report. The offer to purchase contract used by the Calgary Real Estate board, states in clause 2.22 that the seller has to make the RPR available to the Buyer along with a stamp of compliance from the City of Calgary. If one is not available, make sure that you contact your realtor and lawyer immediately. Some mortgage companies are accepting Title Insurance in lieu of an RPR. Call your lawyer to make sure that your mortgage company accepts Title Insurance. If Title Insurance is used there will be a charge to you. You can expect a cost of around $400.
FIRE INSURANCE
The lender requires that you keep your house adequately insured and that the lender is made “First Loss Payable”. A good place to purchase your fire insurance is through the broker that handles your car insurance. To get this proof contact your insurance provider/broker and they will arrange to have your file updated and this information forwarded to you. This proof of fire insurance is to be provided at the lawyer’s office.
PROPERTY TAX ADJUSTMENTS
When you purchase a property you will now have to pay property taxes to the City of Calgary. Property taxes are due in full the last week in June each year. The City has implemented a program called the Tax Instalment Payment Plan (TIPP) which deducts 1/12 of the annual tax bill from your bank account each month. Most lenders now prefer that you pay using this method. There may be a tax adjustment (payment from you or to you depending on the previous owners method of tax payment) for the current year. Your Lawyer will notify you of any “adjustments”.
Please call me to find out more about Closing Costs.
April 13, 2009
News
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One of the common issues that people in Calgary who are looking to refinance is the current market value of their property – the tax assessment says one thing but the market says another. People are frustrated and are wondering where the bottom of the market is.
Well Royal LePage seems to believe that prices are holding up better than expected.
http://www.cbc.ca/canada/calgary/story/2009/04/08/lepage-housing.html
I find the graph at the bottom of the page very interesting – namely that prices in St Johns Newfoundland have increased in the last 12 months Wow!
Cheers!
April 7, 2009
Employed Persons, First Time Home Buyer, List, Pre Approval, Proving income
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The following is what most buyers can expect to have to provide to the lender to purchase a home:
- Job letter – It will need to show:
- your job title,
- the day you started working there,
- your annual salary and
- the contact information for your HR department;
- Current pay stub – a paystub from the last month that shows your gross salary, deductions and net salary will be fine;
- Void cheque – this is so the lender will know where to withdraw the funds from after funding;
- Three month history of your down payment – bank statements, RRSP statements, GIC statements;
- Offer to purchase – this is the agreement between the buyer and the seller that outlines the conditions of the sale;
- MLS listing/Feature Sheet – when purchasing a used house where a realtor is involved the MLS listing is required – for all other deals (private sales and new builds) a feature sheet will tell the lender about the house;
- Real Estate Lawyer contact information – so the lender knows who to send the final paper work to;
- Credit bureau – part of your mortgage broker’s complimentary service;
- Appraisal – your mortgage broker will set this up for you – it is to ensure that the price that you are paying for the property is fair.
This list applies to most people who are purchasing their first home. Other paperwork may be added if you are separated, divorced, business for self, new to Canada, purchasing in a rural area, etc..
A good mortgage broker with the time to look at your situation will be able to help you by providing you with a list of what you will need to gather.
Feel free to contact me if you have any further questions or comment below and I will respond.
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