Frequently Asked Questions
April 20, 2017 | Posted by: Don Chen
This blog is all about the frequently asked mortgage questions from some of my friends and clients. This will be the first of many more to come. Make sure to shoot me a message with your mortgage and real estate questions. Now let’s jump into the Q & A!
What is the difference between variable and fixed interest rates and which one is better?
To answer this question, first I’d like to quickly explain the monthly (biweekly) payments. Every installment you make on your mortgage is a blended payment meaning it’s a combination of interest and principal. Let’s say you have a monthly payment of $1,000/month. The $1,000 is actually not all going towards paying down the principal amount you borrowed. $400 (as an example) of the $1,000 could be going towards the interest you owe to the lender. Now when you get a variable (VRM) or fixed rate mortgage, your monthly payment amount will remain the same. The difference with VRM is that the interest portion will fluctuate as the Prime Rate changes. So in a less stable market, more or less of your monthly payment could be going to paying down the interest. There is a third type of rate structure called Adjustable Rate (ARM). With ARM, the interest portion fluctuates the same way as a VRM but that fluctuation is reflected in the monthly payments. In some months you’ll be paying more and less in other months.
How do I get approved for a second mortgage for a second home?
There are numerous ways get a mortgage approved for the purchase of a second home, and quite honestly there is a solution in the vast majority of the time and it just depends on how much you are willing to pay in terms of interest. Purchasing a second primary home versus an investment property (rental) are done slightly different. Mortgage for a second primary home is fairly straightforward. As long as the TDS and GDS ratios (see Blog: Mortgage Qualification for First Time Home Buyer) are in line with the lender guidelines, it can be done. For secondary investment (rental) properties, a percentage of the rental income can be used to supplement (add-back) your income or to reduce (offset) your liabilities. Either of these methods allow for more mortgage qualified.
What are some of the documents I need to prepare for a mortgage application?
Documents required will depend the lender you choose. With mortgage qualification processes getting more strict, more and more documents should be expected.
Standard documents for clients getting paid a salary or hourly wage: employment letter, two most recent paystubs, NOA (notice of assessment), T4, home appraisal, 90 day history proof of source of downpayment and closing cost (usually 1.5% of purchase price), credit report.
Standard documents for business owners: two year of NOA and T1 general, 6-12 months of proof of deposit if there’s a cash component to the business, business or GST license, 90 day history proof is same as above, credit report, appraisal.
How do I pay off my mortgage faster?
Cash! No jokes. Any extra payments you make on top of the monthly payments go towards paying down the principal. So the more money you put in the faster you’ll be able to pay off the mortgage, and it significantly reduces the amount of interest you pay. This can’t be done with a good mortgage products that allow pre-payment options, such as for example the 20/20. 20/20 allows the client to increase monthly payments up to 20% and a 20% (of the original mortgage amount) lump sum payment every year.
Am i able to take out money that I have put into my mortgage?
You are able to take out money from your property through a refinance either during the term or at term maturity. Refinancing is essentially re-taking a bigger mortgage, where you will have to go through a qualification process. In a way, the money you take out is still a loan and has to be paid back over time. Another way to access cash is through opening a HELOC (home equity line of credit). A HELOC is like a smaller second mortgage on your home. The difference between HELOC and refinancing is ease of accessibility. You can apply for a HELOC any time, but with a refinance you would have to wait until maturity of your current mortgage term to avoid penalty charges.
So there you have them, the first 5 questions! I hope you find some of the answers helpful. I want to give a big ‘thank you’ to the friends and clients for submitting these questions. They are great questions and please keep them coming!