ALAN  ABBASI

ALAN ABBASI

REALTOR®

RE/MAX Realtron Realty Inc., Brokerage*

Mobile:
(416) 829-6020
Office:
416-222-8600
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Mortgage/Home Loans

Mortgage

Understanding the Mortgage Process When Purchasing a Home in Toronto, North York, and the Greater Toronto Area (GTA)

When buying a home in Toronto or anywhere across the GTA, unless paying cash, most homebuyers finance a significant portion of the purchase price through a mortgage. This process involves borrowing money from a financial institution using the property you're buying as collateral.

Mortgage payments consist of two main parts: the principal (the amount borrowed) and the interest (the cost of borrowing the money). Payments can be made monthly, bi-weekly, or weekly, depending on the lender's options. Generally, a mortgage covers up to 75% of the appraised value or purchase price of the home, whichever is lower, while a 25% down payment is required. However, with a high-ratio mortgage, you may be able to make a smaller down payment, less than 25%, while covering the difference with mortgage insurance.

Types of Lenders: Various financial institutions offer mortgages, including banks, mortgage companies, credit unions, and trust companies. Rates and terms vary, so it's essential to compare options from different lenders to secure the best deal. Additionally, a mortgage broker can help by shopping around for the best rates and terms on your behalf. Brokers work with multiple lenders, offering you access to a wider range of products and loan conditions.

Mortgage Approval and Pre-Approval: It’s typically recommended to get pre-approved for a mortgage before making an offer on a property. Pre-approval guarantees that you're financially capable of paying back the mortgage, easing the buying process and increasing your chances of securing the property, especially in competitive markets like North York or Richmond Hill.

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Qualifying for a Mortgage

Qualifying for a Mortgage in Toronto and North York

To qualify for a mortgage in Toronto or the GTA, you’ll need to provide detailed financial documentation, including your employment history, income, and a list of assets (e.g., vehicles, savings) and liabilities (e.g., credit card balances, car loans). A lender will also perform a credit check to assess your financial health. The stronger your credit score, the more likely you are to secure a favorable mortgage rate.

Many homebuyers use online mortgage calculators to estimate how much they can borrow based on their financial situation. These calculators are invaluable tools for planning and budgeting, giving you a better idea of what you can afford before approaching a lender.

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Types of Mortgages

Different Types of Mortgages Available in the GTA

Fixed-Rate Mortgages: With a fixed-rate mortgage, the interest rate is locked in for the mortgage term, meaning your monthly payments will remain constant. This is an excellent option for those looking to protect themselves from rising interest rates, especially if rates are currently low.

Open Mortgages: An open mortgage offers flexibility, allowing you to pay off your mortgage at any time without penalties. This is ideal for buyers who may want to sell their home or pay off the mortgage early. However, open mortgages typically come with higher interest rates compared to closed mortgages.

Closed Mortgages: A closed mortgage provides lower interest rates and set payments for terms ranging from six months to 10 years. While you can prepay up to 20% of the principal annually, breaking the mortgage early may result in penalties, such as three months' interest or an interest rate differential.

Adjustable Rate Mortgages (ARM): ARMs offer flexibility, with interest rates that fluctuate based on the prime rate. When rates drop, more of your payment goes toward the principal, and when rates rise, more goes to interest. These mortgages are well-suited to those who expect rates to fall in the near future and offer significant flexibility without penalties.

Equity Mortgages: Equity mortgages are based on the equity of the property, allowing buyers to borrow up to 80% of the home's value. These loans are often used by those who may not meet traditional income or credit qualifications, such as the self-employed or those with lower credit scores.

Multiple Term Mortgages: This option combines the benefits of both short-term and long-term mortgages, allowing you to divide your mortgage into different terms and rates. However, it requires more effort to manage and is suitable for those who can navigate market fluctuations.

6 Month Convertible Mortgage: A 6-month convertible mortgage offers temporary fixed payments, with the option to convert to a longer-term mortgage.

All-Inclusive Mortgage (AIM): This mortgage takes care of legal fees, title transfer, and other costs automatically.

Secured Lines of Credit: A secured line of credit allows you to leverage the equity in your home to fund other purchases or investments. Up to 75% of the home’s value can be used, and this option offers revolving credit at rates as low as prime.

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Mortgage Glossary

Fees

The costs banks and mortgage companies charge usually include the following:
 

  • Application fee - the money paid to the lender for processing the mortgage documents
  • Insurance - homeowner's coverage for fire and casualty to the home
  • Origination fee - A fee, often a percentage of the total principal of a loan, charged by a lender to a borrower on initiation of the loan
  • Closing costs - The numerous expenses (over and above the price of the property) that buyers and sellers normally incur to complete a real estate transaction.
  • Interest - the cost of using the money, based on a percentage of the amount borrowed.

Every lender or broker should be able to give you an estimate of their fees. Many of these fees are negotiable. Some fees are paid when you apply for a loan, and others are paid at closing. In some cases, you can borrow the money needed to pay these fees, but doing so will increase your loan amount and total costs. "No cost" loans are sometimes available, but they usually involve higher rates.

Down Payment

The amount of money a buyer needs to pay down on a home is one of the most misunderstood concepts in home buying. Some people think they need to make a down payment of 50 percent of the home's price, but most loans are based on a 20 percent down payment. There are mortgage options now available that only require a down payment of 5% or less of the purchase price. If a 20 percent down payment is not made, lenders usually require the home buyer to purchase private mortgage insurance (PMI) to protect the lender in case the home buyer fails to pay. Ask about the lender's requirements for a down payment, including what you need to do to verify that funds for your down payment are available. Make sure to ask if PMI is required for your loan, and also find out what the total cost of the insurance will be.

1. Amortization

Amortization is the paying off of the mortgage debt in regular installments over a period of time, i.e. 30 years. If you pay the same monthly amount according to the terms of your note, then your debt will be paid in the exact number of years outlined for you. You may, however, make additional monthly payments which are applied directly to the principal amount thus reducing your mortgage term substantially. Understand negative amortization. Some home loans offer attractive monthly mortgage payments but at times those low payments don't cover the interest portion of the loan. When that happens, part of the principal amount is deducted, resulting in what lenders call "negative amortization." Simply put, it means you are losing equity in your home.

2. Interest Rate

The interest rate is the monthly effective rate paid on borrowed money, and is expressed as a percentage of the sum borrowed. A lower interest rate allows you to borrow more money than a high rate with the same monthly payment. Interest rates can fluctuate as you shop for a loan, so ask lenders if they offer a rate "lock-in" which guarantees a specific interest rate for a certain period of time. Remember that a lender must disclose the Annual Percentage Rate (APR) of a loan to you. The APR shows the cost of a mortgage loan by expressing it in terms of a yearly interest rate. It is generally higher than the interest rate because it also includes the cost of points, mortgage and other fees included in the loan. If interest rates drop significantly, you may want to investigate refinancing. Most experts agree that if you plan to be in your house for at least 18 months and you can get a rate 2% less than your current one, refinancing is smart. Refinancing may, however, involve paying many of the same fees paid at the original closing, plus origination and application fees.

3. Discount points

Discount points are prepaid interest and allow you to buy down your interest rate. One discount point equals 1% of the total loan amount. Generally, for each point paid on a 30-year mortgage, the interest rate is reduced by 1/8 (or.125) of a percentage point. When shopping for loans ask lenders for an interest rate with 0 points and then see how much the rate decreases with each point paid. Compare the monthly difference in payments with the total discount points you are willing to pay, and see how many months you need to stay in the home to recoup your money. Points are tax deductible when you purchase a home and you may be able to negotiate for the seller to pay for some of them.

4. Escrow Account

Established by your lender, an escrow account is set up to manage monthly contributions to cover annual charges for homeowner's insurance, mortgage insurance and property taxes. The borrower contributes 1/12 of the annual costs monthly so that the lender will have sufficient money to pay for the taxes and insurances. Escrow accounts are a good idea because they assure money will always be available for these payments.

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CREDIT SCORES

The credit score is calculated by a statistical process and provides a guideline for lenders to extend credit (and if so, how much) to a borrower. Mortgage companies, banks, and insurance companies determine the interest rate they will charge based on the borrowers credit score. The credit scoring process encompasses both your pay history and the amount of credit you currently have. The credit score is a substantial portion of the entire credit report.

Low Credit Scores will result in higher payments on loans, credit cards, and insurance.

The credit score is sometimes called the FICO Score, which is an acronym for the creators of the FICO score, F air I saac C redit O rganization

Below is a table showing different score ranges

Score Range Rating
780+ Perfect
720 - 780 Excellent
675 - 720 Average
620 - 690 Fair
Below 620 Low

Don't assume that minor credit problems or difficulties stemming from unique circumstances, such as illness or temporary loss of income, will limit your loan choices to only high-cost lenders. If your credit report contains negative information that is accurate, but there are good reasons for trusting you to repay a loan, be sure to explain your situation to the lender or broker. If your credit problems cannot be explained, you will probably have to pay more than borrowers who have good credit histories. Ask how your credit history affects the price of your loan and what you would need to do to get a better price. Lenders now offer several affordable mortgage options, which can help first-time homebuyers, overcome obstacles that made purchasing a home difficult in the past. Lenders may now be able to help borrowers who don't have a lot of money saved for the down payment and closing costs, have no or a poor credit history, have quite a bit of long-term debt, or have experienced income irregularities. There are companies who specialize in consumer credit repair. Back to Top

Calculate Your Mortgage Possibilities

Mortgage Loan Calculator
Use this calculator to determine your monthly payment and amortization schedule.

Land Transfer Tax Calculator
Determine the amount of land transfer tax you will have to pay. Note that land transfer tax is applied on the sale price only.

Mortgage Affordability Calculator
Can you buy your dream home? Find out just how much you can afford!

CMHC Premium Calculator
A tool to help you estimate the premium payable when you are purchasing a home. Simply enter the purchase price, down payment and the amortization period.

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