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Difference between revisions of "Mortgages and Financing a Home Purchase"
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Mortgages and Financing a Home Purchase (view source)
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{{Dial-A-Law TOC|expanded = housing}} | {{Dial-A-Law TOC|expanded = housing}} | ||
==What is a mortgage?== | ==What is a mortgage?== | ||
A mortgage is a type of loan, often used as a way of | A mortgage is a type of loan, often used as a way of buying a house, where the lender provides part of the purchase price (often most of it) in exchange for the guarantee of repayment plus interest. The mortgage agreement is a contract that both you and the lender must comply with. When you get a mortgage to buy a house, you borrow money from a lender (often a bank) and promise to pay back that money, usually with interest and in regular payments. The lender makes sure you’ll repay the loan with a “charge” against your house. That charge means that if you don’t make your mortgage payments, the lender can take the property or sue you for what you owe. | ||
If your equity in the house is not more than what you owe, the lender may take the property. Equity is the amount that your house value exceeds your mortgage loan and any other debts, judgments, or liens registered against your house. This legal action is called foreclosure, and you can learn more about it in script [[Foreclosure (Script 415)|415]], called “Foreclosure”. Another way to finance a house purchase, called an agreement for sale, is described near the end of this script. | If your equity in the house is not more than what you owe, the lender may take the property. Equity is the amount that your house value exceeds your mortgage loan and any other debts, judgments, or liens registered against your house. This legal action is called foreclosure, and you can learn more about it in script [[Foreclosure (Script 415)|415]], called “Foreclosure”. Another way to finance a house purchase, called an agreement for sale, is described near the end of this script. | ||
==Who is the mortgagor and who is the mortgagee?== | ==Who is the mortgagor and who is the mortgagee?== | ||
The person who borrows the money is the | The person who borrows the money is the mortgagor. The person or company lending the money is the mortgagee. The lender may be a bank, a trust company, credit union, or a person, for example, the seller of the house. | ||
==What is the amortization period?== | ==What is the amortization period?== | ||
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The term is the time the mortgage lasts. Because interest rates are always changing, most lenders won’t lend their money at the same interest rate for as long as the usual amortization period. Instead, lenders first calculate the regular payments as if they were lending the money for the full amortization period at the same interest rate. However, then they lend you the money for a shorter time, or term. You can usually choose terms between 6 months and 10 years. Longer terms often have higher interest rates. At the end of the term, you have the pay the remaining amount of the mortgage to the lender. If there are no problems, you can normally do this by just renewing your mortgage for another term, at the current interest rate. | The term is the time the mortgage lasts. Because interest rates are always changing, most lenders won’t lend their money at the same interest rate for as long as the usual amortization period. Instead, lenders first calculate the regular payments as if they were lending the money for the full amortization period at the same interest rate. However, then they lend you the money for a shorter time, or term. You can usually choose terms between 6 months and 10 years. Longer terms often have higher interest rates. At the end of the term, you have the pay the remaining amount of the mortgage to the lender. If there are no problems, you can normally do this by just renewing your mortgage for another term, at the current interest rate. | ||
What if you want to pay your mortgage off quickly, before the term ends? | |||
Many mortgages let you do this via a prepayment privilege, and there are many types. You may have the right to prepay any amount any time (an open mortgage), or the right to prepay only up to 10% of the mortgage loan each year (a closed mortgage). However, if a mortgage does not have a prepayment privilege, many lenders charge a prepayment penalty if you want to fully pay it off before the mortgage term ends. Usually the penalty is 3 months’ interest. This is an extra expense if you want to sell your house before your mortgage term ends. If this is your case, you should get a prepayment privilege in the mortgage when you get the mortgage (you can’t add it later | Many mortgages let you do this via a prepayment privilege, and there are many types. You may have the right to prepay any amount any time (an open mortgage), or the right to prepay only up to 10% of the mortgage loan each year (a closed mortgage). However, if a mortgage does not have a prepayment privilege, many lenders charge a prepayment penalty if you want to fully pay it off before the mortgage term ends. Usually the penalty is 3 months’ interest. This is an extra expense if you want to sell your house before your mortgage term ends. If this is your case, you should get a prepayment privilege in the mortgage when you get the mortgage (you can’t add it later). | ||
If your mortgage lets you prepay, it’s good to do so if you can. Over the whole term of the mortgage, you’ll probably pay several times the principal amount of the mortgage. So anything you prepay to reduce the amount of the mortgage, called the principal, will save you a lot of money | If your mortgage lets you prepay, it’s good to do so if you can. Over the whole term of the mortgage, you’ll probably pay several times the principal amount of the mortgage. So anything you prepay to reduce the amount of the mortgage, called the principal, will save you a lot of money eventually. That’s especially true in the first years of the mortgage, when more of each payment goes to pay interest than to pay off the principal. | ||
==What is an assumable mortgage?== | ==What is an assumable mortgage?== | ||
An assumable mortgage means that if you sell your house, a | An assumable mortgage means that if you sell your house, a buyer can take over your mortgage. If interest rates have gone up since you got your mortgage, the lower interest rate of your assumable mortgage will be a good selling point. If a mortgage can be assumed with qualification, it means your lender must approve the buyer before the buyer can assume the mortgage. | ||
If the | If the buyer can assume your mortgage, it’s very important to make sure that you won’t still be responsible if the buyer later stops paying the mortgage. Your name stays on the mortgage and you are still responsible, unless your mortgage lets you apply to the lender to approve a buyer under Section 24 of the Property Law Act. Once the lender approves the buyer under this section, you are no longer responsible for paying the mortgage. | ||
==What is a portable mortgage?== | ==What is a portable mortgage?== | ||
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Shop around and compare, just as you do for other goods and services. Mortgage brokers and real estate agents can be helpful when you’re looking for financing, as they have useful contacts with mortgage companies and often know current interest rates and market trends. Banks and other mortgage companies are usually willing to give you a lower rate than they advertise, but you must ask for it—they will rarely offer it automatically. Mortgage brokers can also shop around and negotiate rates for you, but they usually charge a fee for their services. | Shop around and compare, just as you do for other goods and services. Mortgage brokers and real estate agents can be helpful when you’re looking for financing, as they have useful contacts with mortgage companies and often know current interest rates and market trends. Banks and other mortgage companies are usually willing to give you a lower rate than they advertise, but you must ask for it—they will rarely offer it automatically. Mortgage brokers can also shop around and negotiate rates for you, but they usually charge a fee for their services. | ||
== | ==An agreement for sale—another way to finance a house purchase== | ||
An agreement for sale, also called a right to purchase, means that you make a down payment, and then make regular monthly payments to the seller. However, the seller remains the registered owner of the property until you have paid the full purchase price. You protect your interest in the property by registering a “right to purchase” in the Land Title Office. Sometimes, an agreement for sale may be better than a mortgage, because banks and other mortgage companies have mortgage contracts that are to their advantage. If you want to use an agreement for sale, you should negotiate the terms carefully. | An agreement for sale, also called a right to purchase, means that you make a down payment, and then make regular monthly payments to the seller. However, the seller remains the registered owner of the property until you have paid the full purchase price. You protect your interest in the property by registering a “right to purchase” in the Land Title Office. Sometimes, an agreement for sale may be better than a mortgage, because banks and other mortgage companies have mortgage contracts that are to their advantage. If you want to use an agreement for sale, you should negotiate the terms carefully. | ||
==Using a lawyer is a good idea== | ==Using a lawyer is a good idea== | ||
Real estate sales and mortgages are complicated and important transactions | Real estate sales and mortgages are complicated and important transactions. Mistakes can be costly. There are also tax issues that you need advice on. Sometimes there are problems with the way the real estate agent drafted the contract of purchase and sale, or other issues that need legal expertise. There are also fraud risks with real estate transactions. The Land Title Office also has very specific requirements about documents that it will accept for registration. For these reasons, you should see a lawyer when buying a house or getting a mortgage. | ||
==More information== | ==More information== | ||
Check script [[Buying a House (Script 406)|406]], called “Buying a House”. | *Check script [[Buying a House (Script 406)|406]], called “Buying a House”. | ||
*Check the booklet called “Buying a Home in BC Information Booklet” prepared by the Real Estate Council of British Columbia. | |||
[updated | [updated October 2017] | ||
'''The above was last reviewed for accuracy by | '''The above was last reviewed for accuracy by Anna Kurt and Nathan Ganapathi, and edited by John Blois.''' | ||
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