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About Mortgage Contract
A mortgage is the type of loan you are most likely going to need when thinking of buying a new home unless you can pay for the house yourself.
The mortgage covers the part of the purchase price (of the property) that you did not pay.
The home buying process is long and tiresome, right from saving enough money and finding a home to actually buying it and acquiring a mortgage loan is without a question one of the most crucial steps.
But before signing on the loan documents and executing the loan, you need to carefully go through all the terms mentioned in the loan or mortgage contract.
Here are some tips you can follow when reviewing your mortgage contracts.
Always Double-Check: This might seem a little too obvious. Nonetheless, this is something many borrowers do not do, and there are chances you may miss some vital details.
Some things that you must look out for in your mortgage contract include- term, loan amount, monthly payments, and fees.
Overpayment Allowance: Any kind of overpayment that you make, shortens the loan term and thus allows you to off the mortgage loan sooner. This also reduces the overall interest paid to the lender.
A lot of fixed deals permit an overpayment of only up to 10% of the balance every year, without charging any early repayment fee.
While overpaying can be great and reducing your loan term sure seems tempting, you should set aside some savings for emergencies and avoid putting everything you have got into overpayments.
Mortgage Portability: Few years down the line, you may possibly want to move. In such a case it would be important to know if you can move your mortgage over.
So be sure to check the portability of your mortgage even if there is a small chance that you might need it.
Conditions and Warnings of a Mortgage Contract: By far the most important point on this list. Many mortgage contracts comprise warnings and other conditions that may affect your monthly mortgage repayments.
All these conditions are listed in the mortgage contract and you must make sure you go through them and take them into account when deciding to finalize the mortgage loan.
It is important to go through these conditions carefully as some of them can be potentially harmful to you in the future.
One such clause that was seen in a number of mortgage contracts was related to a ‘trigger point’ because of which the borrower may end up in a situation where he is forced to make larger monthly payments if the value of the home falls below a particular threshold.
If you fail to meet this condition and thus violate the contract, you might have to sell the property, the value of which is now lower, in order to pay off the mortgage.
Thus, it is important that you know about this particular clause, and check if your mortgage contract has it.
How does this Clause Affect You?
In the case of conventional mortgages (20% or more down payment), when the market value of the home drops below 80% of the deferred interest plus the outstanding principal, the borrower is notified and has 30 days to either make a lump sum payment and bring the balance down to the appropriate “trigger point” or prove the home value has increased to 80% of the mortgage.
This is what the clause would more or less look like in your mortgage contract:
If at any time the outstanding principal amount (including the deferred interest) exceeds 80% of the fair market value of the mortgaged property as determined by the lender (with or without an appraisal), such amount being the “trigger point”, the lender will give the borrower notice of such excess (the “trigger excess”) and within 30 days of receiving this notice the borrower must do one of the following:
1- make a lump sum payment at least equal to the amount of the trigger point excess; or
2- satisfy the lender that the outstanding principal amount (including deferred interest) does not exceed 80% of the fair market value of the mortgaged property as established by a qualified real estate appraiser approved in writing by the lender, but at the borrower’s expense.
If the borrower fails to comply, the lender has the option of demanding repayment in full of the outstanding principal amount (including deferred interest), plus unpaid interest, costs, charges, expenses that the borrower owes under the mortgage agreements and enforcing payment under the mortgage.
In case of an insured mortgage (less than 20% down payment), when the differed interest plus outstanding principle is more than 105% of the market value of the property, the borrower is informed and has 30 days to either make a lump sum payment and bring the balance down to the appropriate trigger point, or convert to a fixed-rate mortgage, or increase the monthly payment amount.
Here is what the clause would look like in your mortgage contract:
If at any time the outstanding principal amount (including deferred interest) exceeds 105% of the original advance amount (the “trigger point”), the lender will give notice of such excess (the “trigger excess”) and within 30 days of receiving that notice the borrower must do one of the following:
1- pay the lender a lump sum to reduce the outstanding principal amount by an amount at least equal to the amount of the trigger point excess; or
2- agree with the lender to convert the mortgage loan to a fixed-rate mortgage loan; or
3- increase the amount of each regular principal and interest payment to an amount sufficient to amortize the outstanding principal amount (including deferred interest) over the remaining amortization period.
If the borrower fails to comply the lender has the option of demanding repayment in full of the outstanding principal amount (including deferred interest), plus unpaid interest, costs, charges, and expenses that the borrower owes under the mortgage agreements and enforcing payment under the mortgage.
