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Scratching your head about the numbers and concepts on a mortgage agreement? Here are 10 financial concepts you should understand before making in your offer to purchase.
The loan terms
The loan terms of a mortgage refer to the loan amount, the interest rate, the monthly principal, and the interest payment. These terms are locked in once you sign the agreement. The monthly payment could fluctuate based if you’ve opted for an accelerated payment plan, or if you’ve chosen a variable interest rate.
Your estimated total payment
Your estimated total payment is how much you’ll have to put aside each month for all bills related to your mortgage. These include the principal amount, interest amount, insurance, taxes, and condo fees if applicable.
Your closing cost is how much cash you’ll need upfront, to finalize the sale of the property. This includes your downpayment amount, notary fees, welcome and school taxes, and in some cases other fees such as lawyer or inspection/appraisal fees.
Get a detailed breakdown of closing costs on each mortgage amount using our mortgage calculator.
Cash to close
Cash to Close is the amount of cash you’ll need to physically bring to the mortgage closing. It’s calculated by subtracting the fees you’ve already paid from the closing costs.
APR is often confused with interest rate. It’s the annual percentage rate, which means your cost over the long term expressed as a rate. If your APR is higher than 0.5%, your costs are considered high.
“Locking-In” your mortgage rate is done when a buyer applies for a pre-approval or a mortgage. It promises them it’ll match the current rate, even if there is a spike while the buyer is still shopping around or making the offer. The rate-lock period is the amount of time that this lock-in is valid for. It ranges from 30-90, days, based on your particular terms.
Total cost of borrowing
The total cost of borrowing is how much it will cost you, over the long term, to borrow the principal of your mortgage.
The amortization length is the schedule which breaks down each payment into a proportion of principal and interest. The first half of the amortization period is usually interest heavy, and the second half is principal heavy.
Prepayment option amount
A pre-payment option allows you to put down a lump sum each year towards your unpaid principal. It generally caps of at around 15% to 20%. Choosing a pre-payment option lets you pay off your mortgage faster, without binding you to an accelerated plan.
Insurance charges become obligatory when you put down less than 20% of the asking price as a downpayment. In this case, you’ll be charged mortgage insurance until you’ve paid off at least 20% of your loan. It serves to protect the lenders from defaults in loan payments.
Before finalizing any offer, each buyer should take the time to calculate their exact closing costs, and determine which terms are best for their particular financial situation. Such decisions can make the difference between a profitable investment, and one that is stressful or unprofitable.