Mortgage Questions
Does the term 'amortization' leave you perplexed? Are you unsure how pre-approval differs from pre-qualification? If so, you're not alone. Here are some mortgage basics to help you become more familiar with the process.
1. Pre-qualification vs Pre-approval
'Pre-qualification' is often the first step when searching for a home. You supply 'basic' financial information, such as your income, assets, and debts, and the lender then provides a preliminary estimate of the amount for which you may qualify.
'Pre-approval' involves a more in-depth look at your finances and usually requires an application fee, but this process brings you closer to determining your potential interest rate and monthly payment. You'll provide proper financial documents to back up your initial 'basic' numbers, show proof of down payment, and have your credit worthiness considered. Being pre-approved also puts you in a better position in a competitive market because it shows you have your finances in order.
2. Amortization
Amortization is the process of paying off a home loan's principal and interest over time - usually 25 years or more, with a consistent, planned, repayment schedule. In the beginning, most of each payment goes towards interest, but as the loan matures, larger amounts go towards paying down the principal.
3. Term
The mortgage term is the amount of time your mortgage contract is in effect. Terms may range from a few months to 5 years or more. At the end of each term, you’ll need to renew your mortgage, which may mean a new interest rate amongst other factors. You’ll likely need multiple terms within your amorization schedule to repay your mortgage. If you pay the balance at the end of your term, you don’t need to renew.
4. Types of Loans
Fixed and Variable rate mortgages operate as their respective names imply. The 'fixed' loan has an interest rate that stays the same for the length of the term. The 'variable' loan has an interest rate that may start low, but it can fluctuate up or down after a predetermined period, or depending on market conditions.
We have oodles of other mortgage definitions in our Glossary, so please take a peek. We're always here for you. Reach out to get started.
