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Mortgages: What you need to know!
The facts about mortgages and mortgage insurance. Knowledge and to make them work for you.
When attaining a mortgage and navigating the complexities of the banking world, it's essential to understand the nuances of mortgages and insurance options when purchasing a home in Canada. Here's some comprehensive advice:
Understanding Mortgage Types:
a. Fixed-rate Mortgage: This type of mortgage offers a stable interest rate throughout the term. For example, someone might opt for a fixed-rate mortgage at 5% interest for a 5-year term. Pros include predictable payments, making budgeting easier. However, if interest rates drop, clients won't benefit unless they refinance.
b. Variable-rate Mortgage: With this mortgage, the interest rate fluctuates based on market conditions. For instance, someone might choose a variable-rate mortgage tied to the prime rate. Initial rates are often lower, but they can rise, leading to increased payments. On the flip side, if rates decrease, payments may decrease as well.
c. Closed vs. Open Mortgages: Closed mortgages have limited prepayment options but lower interest rates. Conversely, open mortgages offer flexibility but come with higher interest rates. Suppose someone plans to pay off their mortgage early or expects financial changes. In that case, an open mortgage might suit them better, whereas a closed mortgage is ideal for those seeking stability.
Repayment Options:
a. Accelerated Payment: If you opt to make accelerated payments you will pay off your mortgage faster and save on interest. For example, by increasing their monthly payment by just $100, they can significantly reduce the term of their mortgage.
b. Bi-weekly Payments: Always choose bi-weekly payments instead of monthly ones. This method results in one extra payment per year, accelerating mortgage repayment. For instance, someone with a $300,000 mortgage could save over $30,000 in interest and pay off their loan 4 years earlier by making bi-weekly instead of monthly payments.
c. Lump Sum Payments: Everyone should consider making lump sum payments when possible. Even modest payments towards the principal can save thousands in interest over the life of the loan. For instance, a $5,000 lump sum payment on a $250,000 mortgage at 3% interest could save over $8,000 in interest and shorten the term by almost a year.
Mortgage Insurance:
Mortgage life insurance has only one purpose: to ensure your loved ones get to keep the house after your death. If you pass away before paying off the home loan, your mortgage life insurance policy will pay down the balance. However, you can also secure your home with term life insurance. It can help your family cover the mortgage loan and other expenses, like monthly bills and tuition fees.
In fact, in most cases, term life insurance provides better financial security for your family. Here are the main advantages it has over mortgage life insurance:
Considerably lower rates: Term life insurance is usually less expensive because it requires a medical exam. While a medical exam may seem inconvenient, it is actually a good thing. The more an insurer knows about your health, the more accurately they can calculate the risk they are taking on by insuring you. This, in turn, can translate into better rates for many applicants.Most mortgage insurance lets you forgo a medical exam. Hence, they are costlier than a comparable term life policy.Get more coverage: With term life insurance, you can get as much insurance coverage as you qualify for to cover more than just the value of your mortgage. Your policy can be structured to cover all your families financial needs, not just mortgage repayment. Mortgage life insurance, by contrast, is tied to your home loan. The payout is equal to the amount you owe on your mortgage — no more.
Level death benefit: Term life policies have a level death benefit. This means the death benefit amount does not change over the course of the life of the policy’s term. By contrast, the death benefit amount of a mortgage insurance policy reduces annually. Its premium, however, remains the same. As time passes, you make the same premium payments as before for less coverage.
Freedom of beneficiary and payout: Term life insurance allows you to name anyone as the beneficiary and that person is free to use the proceeds however they deem needed. With mortgage insurance, the beneficiary is always the lender and the death benefit is paid directly to the mortgage lender.
Mortgage Default Insurance:People with less than a 20% down payment are typically required to purchase mortgage default insurance from CMHC. While this protects the lender in case of default, it adds to the client's mortgage payments. For example, on a $400,000 mortgage with a 5% down payment, the bank may charge a premium of around $15,000, which is added to the mortgage principal. This is not to be confused with mortgage life insurance. This strictly protects the bank if the mortgage is defaulted on.
By understanding the intricacies of mortgage types, repayment options, and insurance choices, you can make informed decisions tailored to your financial goals and circumstances. Always consult with mortgage specialists and financial advisors to explore all available options thoroughly.
By understanding the intricacies of mortgage types, repayment options, and insurance choices, you can make informed decisions tailored to your financial goals and circumstances. Always consult with mortgage specialists and financial advisors to explore all available options thoroughly.