For a first time home buyer, all the financial lingo could be tough to understand. From the right mortgage lender, the best interest rate and to the loan amount, there is much you need to learn that could really add up. To help sort through all the information, we have a guide for taking out your first mortgage.
The first mortgage doesn’t mean it has to be from the first property you purchase. You can purchase many a home throughout the years and take out many first mortgages. Instead, the first mortgage refers to the position of the mortgage in regards to the property.
This is why there are such things as second mortgages. First time home buyers are looking at taking out a first mortgage. If any happens, such as if the property is sold or flipped, the first mortgage takes precedence over any other mortgages you may have accumulated through the years.
The first mortgage should also usually be the first loan you take out from a lender to purchase a property. Payments are then made monthly in however many terms to pay back the lender (interest included). It works this way in many countries including the States and Canada.
As said, when you take out a loan from a mortgage lender, you need to sign a contract that promises how you will pay the loan back according to the terms . The length of time given and the interest rate incurred depends on your down payment.
In general, the more down payment you deposit for your property, the less the mortgage amount you need to take out, the lesser amount of years to pay it back, and sometimes it results in lower interest rates.
It is worth it to note that your credit score will also determine how much you can take out for your home, and it also affects the rate incurred as well. Aside from the contract, you will also sign a mortgage, and this gives the lender security on your home.
This means that in the situation where you are not able to make the payments, the lender has the right to stake claim on your property and choose to sell it in order to fulfill the payments. This happens with the first mortgage before any other liens taken out on the property.
Your home is your sanctuary, so most people tend to take out mortgages they can pay back. However, it could take years for some. How a first mortgage works is pretty much the same across the board for first time property buyers in Canada or the States.
Also, if the term “first mortgage” is used, this offer hints that there is more than one mortgage taken out on the property.
It’s quite straightforward to note that the second mortgage is taken out after there is already a first. A first mortgage is less risky as it doesn’t put much restrictions on you (other than making sure the mortgages are paid).
In theory, a homeowner will be able to freely renovate, refurbish, etc. the property without having to obtain the lender’s consent. Also, since the first mortgage takes precedence before any other loan, you also don’t generally need the lender’s approval before taking out a second one.
The second mortgage is a bit trickier. Usually, people take out a second mortgage because funds are tight. This can even happen years into the mortgage plan. To continue living in your home with no issues, the second mortgage lender will need to feel assured that you have the ability to make sure the payments are paid.
There is also such a thing as a third mortgage.
For those buying a home for the first time, all the information above can be daunting and overwhelming. To give you a hand, we have created an example to give you a clear view of the financial picture involved with a first mortgage.
Let’s pretend the cost of your property is $100,000 (if only houses were still that affordable). Let’s say you put down $20,000 of your own money and take out a first mortgage on the remaining $80,000.
Due to unforeseen circumstances, you take out a second mortgage years later for the amount of $10,000. Let’s pretend that you then suffer financial difficulties so the lender then needs to step in. In order to fulfill your payment for the mortgages, the land is sold.
The land and your home sells for $80,000, which the loaner and you take at a loss. In this case, the first mortgage lender will receive the full amount they are owed – $80,000. If there is any cash left, it will go to the second mortgage loaner. In this case, due to our math, there will be nothing left for the second mortgage.
The interest that you pay on the first mortgage is tax deductible, which lowers the amount of taxable income that you have. This is sort of a buyer’s incentive for mortgages to take out a loan. As long as they are paid, you can write them off as a deductible. However, this only applies to those with itemized deductions.
If you can purchase your home without any mortgages needed, there will be certain benefits. This means your property is paid for in full and no loan is required. The term for this would be having the cash ready.
A mortgage isn’t only an option for those who can’t afford the full price. You have lots of people who can afford it that take out a mortgage as well, and that is because it makes more sense to do so in their financial situation.
Taking out a mortgage affords you the flexibility to pay off your home in time. The term can range from under 10 years up to however many it takes to pay it off. A mortgage is often the price of not having the sum of money ready to buy.
However, with housing prices soaring higher and higher, it’s getting more and more difficult for people to purchase without the help of a mortgage. Sure, you take a hit with the interest over the years but that’s the only way some people can afford a home while putting food on the table.
Don’t be too afraid of mortgage interests, as it’s very likely for some to negotiate relatively low rates. Plus, the interest could be tax deductible for you, which is another incentive other than the flexible payment plan.
You leave more cash on hand for other things and there is no pressure of accumulating a large down payment. One more thing to note is that a mortgage can sometimes improve your credit rating as well.
Broaden your understanding of mortgages—learn what it takes to buy out your partner in a mortgage in a Canadian setting, next!