Why you need to get pre-approved for financing before you shop for a home.

You never know how long it will take to find your perfect home. It could take a week or it could take a few months. Once you've found your perfect place you and your agent will only have a few days to firm up the deal. Usually financing will be the determining factor on whether you can proceed or not.

That is why it is so important to be pre-approved. It will determine what budget you can reasonably afford. (note: it does not guarantee that your financing will come through on a particular property therefore it is strongly recommended to make any offer subject to financing).

Here are some of the benefits of getting pre-approved:

• On a fixed rate mortgage you are protected if interest rates rise, usually up to 120 days.

• You will automatically get a lower rate if rates go down while you are searching.

• You will know your monthly mortgage payment obligations which will help with your overall budget.

• You will know what home price ranges to search in which will save you time by looking at only properties you can reasonably afford.

• You will be able to move quickly by making an offer when you do find your home.

HOW TO GET PRE-APPROVED

The first thing to do is meet with a mortgage specialist. This individual could be a representative of your favorite bank or a mortgage broker. A mortgage broker is not affiliated with any bank but will shop for the best rate from many sources.

You will need to complete an application which will include your current financial status (income, assets, loans and obligations). This will determine how much you can borrow and at what rate.

Here is a list of some of the documents you will need to supply the mortgage specialist:

• Photo identification

• A record of employment (T4 slip, notice of assessment, paycheck stub)

• A letter from your employer stating years of service and current salary

• List of bank accounts and investments and their location

• List of assets such as: vehicles, properties, investments

• details of your liabilities: credit cards, loans, student loans, lines of credit, payments etc.

Once you have completed the application form your mortgage specialist will ask you to consent to a credit check.

CHOOSING YOUR AMORTIZATION PERIOD

Amortization is the period of time it will take to reduce your mortgage balance to zero. In Canada you can choose an amortization period up to 35 years.

The longer the amortization period the smaller your monthly payments will be and the more the total interest will be over the term of the mortgage. The shorter the amortization period, your monthly payments will be higher but you'll pay less interest over the term of the mortgage.

Here is an example of two different amortization periods for a $200,000 mortgage at 7% interest on a fixed term with monthly payments:

CHOOSE THE TERM

The mortgage term is the amount of time your mortgage contract is in effect. You can usually pick from 6 months, 1 through 5 years or longer. At the end of your term you'll need to renew your mortgage at the rates available at that time.

SHOULD YOU GO VARIABLE OR FIXED RATE?

There are pros and cons for both fixed and variable rates. With a fixed rate mortgage everything is known. You'll know that the interest rate on the mortgage will not rise during the term you picked even though interest rates have risen. You will also know what your outstanding balance (Principal) will be at the end of the term.

With a variable rate mortgage your interest rate will go up and down with the prime rate. Your monthly payments will remain the same however what changes is the amount that's applied toward the interest versus the principal. Therefore, if interest rates rise, more is going towards the interest and less is going towards paying off your loan. This will also change the initial amortization period, it will be longer if rates rise or shorter if rates fall.

It's always a good idea to consult with a mortgage specialist who will assist you in deciding whether a variable or fixed rate is best for you.

OPEN OR CLOSED MORTGAGE

An OPEN MORTGAGE allows you the flexibility of paying down all or part of your outstanding principal at any time without any penalties. A CLOSED MORTGAGE provides the security of fixed payments for a period of time - up to 10 years with most lenders, but also limit your prepayment options. Here are some examples of prepayment options usually available for CLOSED MORTGAGES:

Increase your mortgage payment:

This option allows you to increase both your principal and interest payment usually up to 20% of your current payment and can be used once every calendar year with no penalties.

Lump Sum Payment:

This option allows you to make a lump sum payment based on a proportion of the original loan amount (up to 20% of the initial loan amount) every calendar year with no penalities. You still keep your monthly payment amounts the same. For example, your loan amount is $200,000 and your lender allows lump-sum payments up to 20%, you can therefore prepay $40,000 each calendar year.

CHOOSING YOUR PAYMENT SCHEDULE

Traditionally mortgage payments were made every month. Nowadays, mortgage payments can be weekly, bi-weekly or bi-monthly. The most popular being bi-weekly to coincide with burrowers' paychecks.