Section 2: Buying or Building a Home

Arranging Financing

Frequent reference has been made in this lesson to financing the purchase of a home; now it's time to look more closely at how this is done.

When people buy real property; they normally pay for it in one of two ways:

They simply put down the cash and get title to the property as soon as the lawyers have done the paperwork.
They borrow the money by obtaining a mortgage .

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The second method is by far the most common; most people obviously don't have the cash needed to buy a house.

A mortgage is a legal document that gives the party lending the money a claim on the property until the debt is repaid. In other words, if the money isn't paid back (with interest, of course), the lender can take over the property. The buyer of the property who takes out a mortgage to finance the purchase is called the mortgagor and the lender is the mortgagee .

Mortgages can be rather complex arrangements, and it's far beyond the scope of this course to discuss them in any depth. Basically, what happens is that the financial institution checks out the credit-worthiness of the purchaser to see if the risk of lending that person money is a good one. They buyer will be required to have a real property report made up and the value of the property appraised. They buyer will also be required to pay a certain percentage of the purchase price as a down payment-just to ensure that he or she is serious about making a financial commitment.

Interest rates and repayment schedules also have to be worked out. Rates vary with the term of the mortgage-the time period for which the mortgagee will lend money to the mortgagor without renegotiating the arrangement; rates can also change dramatically depending on the prevailing economic climate. They can vary slightly from one institution to another, as well, so buyers are well advised to shop around. The longer the mortgage is to last, the smaller the monthly payment will be; but the overall amount the mortgagor will eventually pay back will be greater-sometimes much greater.

Both mortgagees and mortgagors have legal rights and obligations. Mortgagors have the right to clear title of their property once they've repaid the amount they've borrowed (the principal) along with interest. They also have the right to quiet possession of the property as long as they make their payments.

Mortgagors' obligations include making their agreed-upon payments, keeping their property in a state of reasonable repair, and insuring their home against such things as fire. After all, mortgagees wouldn't have any security for their loans if there were a risk that the homes they mortgage might burn down without any insurance coverage. Mortgagors also have an obligation to pay their property taxes and comply with things like zoning bylaws.

Mortgagees have the right to demand regular payments as agreed upon from mortgagors. Mortgagees don't have to accept speeded-up (accelerated) payments, though some do agree to this possibility in their mortgage documents. Others will accept such payments but impose a financial penalty on the mortgagor. That is because the longer the mortgage lasts, the more money the lender gets in interest. Which means that if mortgagors suddenly come into some money - perhaps through an inheritance - and want to pay off all or part of what they owe, their mortgagee might not let them - or might let them but impose a financial penalty. It is important to talk these things over before taking out a mortgage so you can learn just what your rights are.