Every homeowner dreams of the day when he can throw his mortgage documents after making his last payment.
With smart planning and informed decisions, this day can come faster than you think.
You should, however, determine the amount you can pay before entering the real estate market. There are many tools online to help you with this step.
Lenders want to make sure that your total monthly shelter costs (including mortgage payments, taxes, and utility charges) do not exceed one-third of your household’s gross income and that your debt ratio (including car loans) does not exceed 40 percent of your gross household income.
All lenders have software to calculate the maximum amount of the loan to be granted and the maximum value of the house you can buy.
The importance of the down payment
A large down payment is a great way to reduce the amount of the mortgage. People who have not accumulated a lot of savings and who do not want to wait to save more for a larger down payment can take out a high mortgage. The cost of this insurance can be up to 3.35 percent of the value of the mortgage and is usually added to the capital borrowed.
Options to Consider When Choosing a Mortgage
It is important to consider the following options when choosing a mortgage:
- Fixed or variable interest rate
- Amortization period
- Redeemable in advance or closed
Very little variable risks
In the event of a small increase in the floating rate, your payments may remain unchanged. The only difference would be an increase in the interest portion of the payment. If the rates increase significantly.
Before opting for a variable rate, ask the lender to explain all the possible scenarios to you. Specifically, find out about interest rate fluctuations that would cause an increase in payments. You could add an option to switch to a fixed-rate at any time, but remember that at this time, the longer-term rates may also have changed.
The term of a mortgage loan can range from six months to ten years. Generally, the longer the term, the higher the interest rate.
The advantages of a prepayable mortgage
Fixed-rate mortgages are generally closed. They allow early repayment of a lump sum of up to 20 percent of the original loan amount, depending on the lender. This is a very important element to assess before signing. You could also increase the number of your regular payments, up to double the amount – an option that may be suitable for people whose income is increasing regularly.
Paying off a mortgage at once or breaking a mortgage for a better rate often results in monetary penalties. Some lenders offer prepayable mortgage loans, which allow borrowers to repay their loans at any time, in whole or in part. The flip side is that the interest rate could be considerably higher.
What should you choose: A longer or shorter amortization period?
Of all the applicable variables, a shorter amortization period provides the quickest path to a life without a mortgage. Long amortization periods are particularly popular with first-time buyers, as they reduce the number of mortgage payments. However, these lower payments have a disadvantage, which is a higher interest cost.
Accelerated payments can help you pay off your mortgage faster
Depending on the lender, you can choose weekly, biweekly or monthly payments. The more frequently you make payments, the less interest you will pay over the life of your mortgage (at a constant interest rate).
You can also make “accelerated” payments to decrease the total amortization period. While a payment made a few days in advance has little effect on the amount of interest saved, accelerated payments increase the total payments over a year, allowing you to pay off your mortgage faster.