A Homebuyer's Guide Into Understanding Mortgages
Sun, April 18, 2021

A Homebuyer's Guide Into Understanding Mortgages

 

Taking out a mortgage is one of the most important financial decisions most people will make, noted Mia Taylor of Bankrate, a consumer financial services company. A mortgage is defined as a loan from a bank or other financial institution to help you purchase a home. The collateral is the home itself and the bank can sell it and recoup its money if you fail to pay the lender every month and back out on the loan. Hence, it is important to learn the peculiarities of mortgages before purchasing your dream house.  

Mortgage Consumer and Homebuying Survey: Key Findings

CMHC (Canada Mortgage and Housing Corporation), a Crown Corporation of the Government of Canada, involved 1,385 first-time and repeat homebuyers for their 2019 online survey. 65% of buyers said they believe the new mortgage qualification “stress test”— which is the new federal mortgage qualification rule—  will prevent more Canadians from taking on a mortgage they can’t afford.

Buyers who were affected by the rules were still able to purchase a home by making other compromises such as buying a smaller (52%) or less expensive home (61%), reducing their other expenses (60%), or dipping into their savings (59%) to increase their downpayment. Only 76% said the “stress test” had little or no impact on their decision to purchase a home.  

For homebuyers, the top “must-haves” were price/affordability (80%), number of rooms (73%), and proximity to public transit (67%), number of bathrooms (60%), and proximity to daycare/schools (58%). 47% of homebuyers utilized both online and offline resources to look for information about mortgages or buying a home while others used only online sources (30%) or conducted their  research offline (23%). Mortgage brokers (21% of buyers and 45% of lenders) were the most frequently consulted online sources.

Buyers also went online to compare interest rates (87%) or to use a mortgage calculator (82%). However, 68% of buyers did not rely on any social media platforms to gather information unlike 23% of those who use them to research.32% of homebuyers said they do not expect interest rates to increase in the following year, up from 2018’s 20%. 47% of purchasers were first-time homebuyers in 2020, down from 2018’s 56%. In 2019, 60% of buyers spent the maximum amount they could afford in 2019, down from 78% in 2018.

Compared to 28% of buyers who recognized the value of using a real estate agent in 2018, the figure reached 35% the following year. 23% of buyers admitted that their current level of debt is higher than they were expecting and 81% of buyers noted that their current home meets their needs. Since owning a home, 59% of buyers cut back on their non-essential expenditures such as entertainment (66%), vacations (55%), and food (44%).

Additionally, 87% of buyers were confident in the long-term financial prospects of homeownership and their future ability to make their mortgage parents. 32% of buyers were also paying more than their minimum mortgage payments while 61% had a “buffer” to pay for possible higher expenses in the future.  

 

 

What Are the Types of Mortgages?

A fixed-rate mortgage is when the interest rate is agreed upon when making the purchase, which stays the same for the entire duration of the loan. Adjustable-rate mortgage (ARM) may be periodically raised or reduced as rates change. It is based on a standard financial index such as the interest rates established by the London Interbank Offered Rate (Libor) and the Federal Reserve.

Balloon mortgage involves low payments, growing into larger sums before the loan ends. In general, this is more suitable for buyers who will earn a higher income at the end of the loan or borrowing period. Insured by the Federal Housing Administration, an FHA loan is a popular type of mortgage for first time buyers as it requires minimum credit scores and lower down payments in some cases, with the average being 3.5%, according to Robert Kirkland, senior home lending advisor at JPMorgan Chase.

The US Department of Veterans Affair guarantees the VA loan for veterans, service members, and eligible military spouses. The loan is supported by a government agency and lenders usually offer it with less stringent credit parameters and without requiring you for a down payment

 

 

How Do Mortgages Work?

The principal refers to the specific amount of money you borrow from a lender to purchase a home. So if you borrow $100,000 from a lender when buying a $100,000 home, that’s the principal. Kirkland explained that the interest is the cost you have to pay for borrowing the principal. You can pay a mortgage back on a regular basis (ex: monthly payment), which usually consists of principal and interest charges. Your monthly payment— which would depend on your mortgage agreement— may include property taxes, homeowners insurance, and mortgage insurance.

What Are the Mortgage Trends Buyers Need to be Aware Of?

Holden Lewis of web portal MSN forecasted that it would be difficult to find homes to buy, with low inventory being more prevalent from 2020 and beyond. Since COVID-19 will continue to spread, sellers will be more hesitant in putting up their homes for sale, which would affect home sales.

The pandemic will also exacerbate housing insecurity as millions of people are laid off, furloughed, or unemployed. Enacted on March 27, the Coronavirus Aid, Relief, and Economic Security Act provides mortgage relief for homeowners who have lost their income during the pandemic. Tenants of apartment buildings with federally backed mortgages were given rental relief and an eviction moratorium. Homeowners can request mortgage forbearance until the end of the year, but millions of renters will be homeless once the protections expire on July 24.

Stay-at-home orders, social distancing, and fear sparked the rise of 3D home tours, allowing potential buyers to digitally visit their homes. This is also the perfect technology for buyers who are reluctant to walk through a stranger’s house. 3D home tours will leverage technology similar to Google Street View. Lewis conjectured that 3D home tours will become more popular as it helps buyers conduct multiple virtual visits and narrow their list of homes to tour in person once the pandemic ends.

 

There are different types of mortgages, with each one catering to the buyer’s specific needs and preferences. Nowadays, buyers need to be aware of any upcoming housing and mortgage trends such as 3D home tours and low inventory. As COVID-19 continues to plague the world and disrupt the economy, buyers might encounter obstacles when finding and purchasing a home.