You faithfully pay your mortgage every month, but do you know what goes into it? Probably not. When your current loan term is up, you should take some time to study what goes into your payment. It might help you make a better decision when it comes time to renew your mortgage. Here are a few terms you must know to help you understand your home mortgage.
Your principal amount is the amount you borrowed. This has to be paid back in full. Obviously, your mortgage is partially made up of this dollar amount. For example, if your home costs $250,000, then $250,000 is the principal.
Interest is how your lender is compensated. An interest charge of 7 per cent, for example, means that for every $100, your lender earns $7. In fact, if your loan carries on for 25 years, you may end up paying as much interest as principal on the loan.
One way to lower your interest on your mortgage is by using a guarantor – a person who co-signs the loan for you. Usually, it’s a person with a strong credit rating who helps you qualify for better mortgage rates and terms.
Interest rates are either variable or fixed. While Canadians seem to love variable rates, they’re only really beneficial when interest rates in the marketplace are falling. Otherwise, there’s little benefit to carrying a variable-rate mortgage.
Most Canadians are better off choosing fixed-rate mortgages if interest rates are expected to rise within the next 5 years or so. This prevents mortgage payments from rising with market interest rates. Since interest is a large determining factor in the monthly mortgage payment, you should carefully examine whether rates in the marketplace are falling or rising, and choose a mortgage that will help you pay the lowest interest over the life of the loan term.
Every Canadian has to pay property taxes which are driven by the value of your property. Many lenders wrap the taxes up into the mortgage payment. This makes paying taxes a little easier to swallow. It’s also a great way to ensure that you don’t fall behind and end up owing the government back taxes plus penalties.
There are a few types of insurance that are sometimes wrapped up into a mortgage repayment. Homeowner’s insurance covers the dwelling and contents of your home. It protects you if your house should catch fire, or you’re the victim of theft.
If you decide on replacement coverage, it will cover the full replacement cost of the home plus its contents.
Another type of insurance commonly tied into a mortgage payment is PMI (Private Mortgage Insurance). It’s protection for the lender in the event that you default on the loan. Should you miss any installments, the insurance pays for you. While this sounds like a good deal, it ruins your credit rating in the process. It’s a last resort for the lender to recoup at least part of the principal on loan to you.
Are you getting ready to apply for your first mortgage loan? Visit ComFree.com today to browse listings within your price range.
Jeff Noble has extensive experience in assisting people with mortgage applications. He also enjoys blogging and sharing his insights. He recommends using guarantor for lowering your interest on mortgages.