First Mortgages

If you’re a homeowner in Canada, chances are you took out a loan to pay for your house. That load, when taken out from a bank or other lender to pay for a first home, is called a first mortgage. First mortgages are paid back with a set interest rate over an amount of time agreed to by both the homeowner and private mortgage lender. Many homeowners choose to take on additional loans so they can use the money improve the home and/or cover other financial needs. Subsequent loans taken out are called a second mortgage, a third mortgage, and so on.

When Are First Mortgages Required?

Owning a home is often considered to be the biggest investment one can make; however, most people do not have the funds required to make such an important purchase: that’s where first residential mortgage comes in. Typically provided by banks or other financial institutions, first mortgages see the lender pay the money in full to the selling party, while the homeowner pays the money back to the lender as their first mortgage over an agreed period of time.

First Mortgages: Things to Look for

First mortgages are a huge responsibility, so those people considering one should consideration the following factors before making their final decision:

Credibility of the Lender: When it comes to something as important as first mortgage loans, you should always thoroughly research the lender before meeting them, let alone agreeing to any terms.

Loan Amount: It’s vital that potential borrowers determine a loan amount that lets them both buy their home and repay the sum to the lender in a way that doesn’t add stress. A good way to do this comes from going over your finances first, then examining your income and debts. Finally, based on your remaining debts, determine a loan amount that you can repay comfortably; only then should you begin looking at housing options.

Rate of Interest: When searching for a suitable first mortgage, make a list of trustworthy mortgage lending institutions, determine the needed loan amount, and then compare the interest rates being offered by various lenders you’re considering. This way, you’ll be able to figure out the current market interest rate. Since lenders offer both fixed and variable rates of interest, ensure you choose the most suitable one for you by acquiring the help of a professional mortgage advisor.

Time Period: Another important aspect of first mortgages is how long paying back the loan will take. The amount of time it takes to pay back first mortgages can vary between homeowners. Paying back the loan over a short period of time will help to save money on the amount being paid over the course of the mortgage, but may risk stretching your monthly budget to the limit. In comparison, paying your mortgage over a longer period of time will mean paying more interest, but allow for greater financial freedom.

Penalties for Breaking Out of First Mortgages

While first mortgage loans in and across Ontario should not be taken on lightly, circumstances may require you to break out of your first mortgage. If you are looking to break out of your mortgage, you should contact the lender immediately to get an understanding of the conditions The penalties of breaking out of first mortgages often include interest rate differential (IRD) charges, which are calculated by the lender to compensate them for the loss of money through the interest rates as a result of the early breakout. First-time home buyers considering breaking out of their first mortgage should get help from a professional mortgage advisor who can help them calculate the necessary amount and help them make an educated decision.

When People Should Break Out of First Mortgages

Breaking out of first mortgages may be inconvenient, but when you consider the future, it may just be the best solution. Even though there are penalties involved with breaking first mortgages earlier than the date of maturity, it can potentially save homeowners thousands of dollars over the course of their mortgage.

Client's Current Mortgage Mortgage Savings
First Mortgage Amount $ 500,000 $ 500,000
Interest Rate 4.99% 2.95%
Term (Years) 5 5
Amortization period (Years) 25 25
Monthly payment $ 2,905.18 $ 2,352.42 $ 552.76
Remaining Term (Months) 24 60
Total Remaining Payments for 24 months $ 69,724.32 $ 56,458.08 $13,266.24

Most lending institutions have penalties for breaking out of first mortgages before the date of maturity so, depending on the penalty, there may not be an advantage to doing so. You should speak with a mortgage advisor who can calculate the penalty and help you to weigh your options to see what works best for you before you take steps towards deciding whether to break or renew your current mortgage.

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