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Over the course of your amortization period, you
may have many different mortgages. The term is
simply the length of time that interest rates,
payment schedules and obligations to the lender
exist. When the term comes to a close, you will
have the option to renew your mortgage (taking
into account current market conditions) at your
current or new lending institution. You can also
put a lump sum toward the principal without
restriction, or pay off your entire mortgage
without penalty. If you wish to change the
structure of your agreement during the term you
may have to pay a substantial fee to the lender.
Mortgages are available with closed, open and
convertible options, with fixed or variable
rates. The options you choose will reflect your
beliefs about the market -- is it going up or
down? -- and your short-term goals and desire
for long-term security.
Amortization
This is the amount of time over which the entire
debt will be repaid. Most mortgages are
amortized over 15-, 20-, or 25-year periods. The
longer the amortization, the lower your
scheduled mortgage payments, but the more
interest you pay in the long run.
For payment comparison over various amortization
periods, refer to the schedule of payments.
There Are Ways to Reduce Your Interest Payments
1. Negotiate a shorter amortization period.
(That's the number of years over which you'll
pay off the total amount of the mortgage. Don't
confuse this with the term of the mortgage,
which can run from 6 months to 10 years and must
be renegotiated.) A shorter amortization period
will mean higher monthly payments, but you'll be
paying more principal with each payment.
Consider this:
Let's say you borrowed $100,000 at 10% interest.
(I'm using round numbers for ease of
illustration and assuming a constant bank rate.
You know that today, you'll certainly be able to
get a lower rate.)
| Amortization Period |
Monthly Payment |
Total Payments |
Total Interest Paid |
| 25 years |
$895 |
$268,500 |
$168,500 |
| 20 years |
$952 |
$228,480 |
$128,480 |
| 15 years |
$1,063 |
$191,340 |
$ 91,340 |
| 10 years |
$1,311 |
$157,320 |
$ 57,320 |
| 5 years |
$2,148 |
$128,880 |
$ 28,880 |
2. Accelerating your payments. Opt for a weekly
or biweekly payment schedule. More payments per
month mean less overall interest.
Let's go back to our $100,000 loan at 10% for 25
years.
| Payment Schedule |
Amount |
Total Interest |
Mortgage-Free |
| Monthly payment (12) |
$895.00 |
$168,500 |
25 years |
| Biweekly payments (26) |
$447.50 |
$118,927 |
18 years, 10 months |
| Weekly payments (52) |
$223.75 |
$118,111 |
18 years, 9 months |
3. Put lump sum payments toward your principal.
When negotiating your mortgage, ask how
frequently you can make a lump sum contribution.
Most financial institutions allow a percentage
of your overall mortgage to be contributed on
your annual mortgage anniversary date. Depending
on the type of mortgage you select, you may also
be able to negotiate additional monthly, or even
weekly, payments. These payments will rocket you
toward mortgage freedom.
OK, here's another illustration assuming you
have an $80,000 mortgage at 8% with a 25-year
amortization, and you're able to put an
additional $2,000 lump-sum payment toward it
every year.
| |
No Lump-Sum
Payments |
$2,000 Annual
Payments |
| Mortgage-Free |
25 years |
14.8 years |
| Total Interest
Paid |
$103,165 |
$55,549 |
Open Mortgage
This type of mortgage offers a great deal of
flexibility, as it can be repaid in part or full
at any time without penalty. This is a great
mortgage if you believe interest rates are
moving down or if you plan to move in the near
future. The term may be limited to six months or
one year.
Closed Mortgage
Here the interest rate is fixed for the full
term of the mortgage, and you will have to pay a
penalty to change the agreement conditions. This
type of mortgage is ideal for buyers who suspect
that interest rates will rise and who are not
planning to move in the near future. This type
of mortgage is usually available in a wide
variety of terms.
Convertible Mortgage
With this mortgage, you'll enjoy the same peace
of mind as a closed mortgage, plus the
flexibility to convert to a longer closed
mortgage at any time without penalty. If you
think rates will drop, this will allow you to
wait until you feel they have hit bottom, or if
rates rise, you can lock in.
Additional Costs
Before you calculate the amount of your down
payment and determine what you can afford, it's
a good idea to set aside a few thousand dollars
to cover the extra costs that seem to spring out
of nowhere. Here is an overview of costs you
could encounter. The good news is that not all
of them will apply.
Property Taxes
If the Vendor has paid a portion of the taxes in
advance, you will be responsible for reimbursing
the Vendor on closing. Plus, if you have a
high-ratio mortgage, your lender may require
that you have your property taxes added to your
mortgage payments.
Utility Fees
Utility fees are calculated through a meter so
you will be responsible for paying what you have
used up on the meter.
Land Transfer Tax
This applies in most provinces and ranges from
1% to 4%. For instance, in Ontario, you'll pay
1% of the first $55,000 - $250,000 and up to 2%
of any amount over $400,000.
Survey Fee
Your lender will require an up-to-date survey.
You can make it a condition of the Offer to
Purchase that the Vendor provide a survey, or
you will have to have one done. If there is no
survey available, you may purchase "Title
Insurance" in lieu of a survey which saves you
about $500 - 700.
Appraisal Fee
A basic appraisal usually costs under $250.
Property Insurance
Your lender will insist that you have insurance
on your property because your home is used as
security for the mortgage.
Service Charges
You'll be charged for telephone, cable and a
variety of other services that you hook up at
your new home.
Lawyer (Notary) Fees
Each real estate transaction requires the
assistance of a legal professional to review the
Offer to Purchase, search the title, draw up the
mortgage documents and take care of the details
on the day of closing. Lawyers fees range widely
depending on the complexity of the transaction.
Ask your RE/MAX sales representative to
recommend a lawyer. And remember, fees can be
negotiated.
Mortgage Loan Insurance Premium and
Application Fee
Mortgage loan insurance will be necessary if you
have a high-ratio mortgage (less that 25% down
payment). The application usually costs $75 with
a valid appraisal, otherwise it's $235. The
actual insurance premium will range from .5% to
3.75% of the purchase price and is added onto
the mortgage.
Mortgage Broker Fee
Some brokers may charge as much as 2% of the
total mortgage to find you a lender. In most
cases though, the broker is paid by the lender.
Buyers with good credit should not have to pay a
fee.
Moving Costs
Whether you've decided to do it yourself or hire
a moving company, now is the time to budget for
the costs involved.
Estoppel Certificate
If you're moving into a condominium (complex not
necessarily a high-rise) this certificate
outlines the condominium corporation's financial
and legal state. It will cost you up to $50.
Condominium Fees
These monthly fees vary from complex to complex.
The fees are applied to everything from grounds
keeping and carpet cleaning to security
personnel and health club maintenance. Depending
on the type of structure, these fees will
usually be a few hundred dollars.
Home Inspection Fee
For around $300, depending on the size of your
home, you'll receive a complete written report
about the condition of the structure. Do your
research and hire a reputable firm.
Renovation and Repairs
Your home inspection may indicate the need for
some general repairs or a major project. Have
some money set aside, particularly if you are
purchasing an older home.
Redecoration
Your taste will be different from the previous
owner. Set aside money to paint and wallpaper.
Prepare a list of things you can live with, for
now, and decorating faux pas that need immediate
alteration.
Water Quality Certification
If you are purchasing a home with a well, you'll
want to ensure the quality of the water. This
will cost approximately $50 to $100.
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Looking
to Buy or Sell real estate in the Yonge & Eglinton area? Well you
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