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Part 1 - Termilology and
Types
Part 2 - Down Payment and Amortization
Part 3 - Deciding on a Term and Options
This section explains mortgage terminology and how a mortgage works. A mortgage
is in simple terms, a loan that you take to buy a home. The loan
is secured by the property value, and your ability to repay the
loan. The amount borrowed is called principal, and the cost of borrowing
the money is called interest. The borrower is the mortgagor, and
the lender is the mortgage.
Conventional Mortgages: Under a conventional mortgage,
a lender will normally provide up to 75% of the appraised value
or purchase price of a property, whichever is less. You must
be able to provide at least 25% of the financing on your own.
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Example:
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Purchase Price |
$200,000 |
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Conventional Mortgage
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$150,000 Required |
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Down Payment |
$ 50,000 |
High Ratio or Insured Mortgage:
A high ratio
mortgage finances a higher percentage - up to 95% - of the appraised
value or purchase price of the property, whichever is less. This
type of mortgage must, by law, be insured against non-payment by
the Canada Mortgage and Housing Corporation (CMHC). Mortgage insurance
protects the lender against loss if the borrower fails to meet the
repayment terms. The application fee (approximately $100 – maximum
$250) and insurance premium (approximately 0.5% to 3.75% of the
loan) are paid by the borrower. The higher the ratio of mortgage
to down payment, the higher the cost of insurance. Mortgage insurance
is subject to provincial sales tax.
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Example:
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Purchase Price |
$200,000 |
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Down Payment Available |
$20,000 |
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Assuming insurance premium of 2.5% |
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Amount of Mortgage |
$180,000 |
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