The price of shelter.

Almost everyone has to borrow money to buy a home. A lucky few can go to the Bank of Mom and Dad for a low-cost loan--for everyone else there's the mortgage.

A mortgage is similar to a loan, but there are some wrinkles in the fine print that make it different.

The home you like the look of has a $200,000 price tag. The bank won't lend you the full two hundred grand; it will want you to put a down payment on the property. This down payment will be a minimum of five percent, or $10,000 off the cost of your dream home. It's better to scrape up ten percent or more if possible; many lenders find loaning 95 percent of the value of a property too risky.

The lender writes up a legal document to cover your promise to pay back $180,000, plus interest, over a given period of time. Usually, the loan is repaid in small amounts, once a month, over 25 years or so (There are some cost-saving tricks--see "Shortcuts").

Getting the mortgage requires a lot of disclosure of personal details. What's your work history? How much do you earn? What credit cards do you have? How much do you owe on them? The lender wants to make sure you're good for the money you're borrowing.

You might be a clean-cut person with a good job, so the mortgage lender can take your word for it that you'll pay back the money, right? It doesn't work that way. Mortgage lenders tend to be a cautious bunch so they will want some security that you will keep your word. That security is your home. If you fail to repay the loan, the lender can seize your property and sell it to recover the amount of the loan. This is called foreclosure, and it's written right there in the mortgage.

There are a lot of other things written in that document that really need a professional eye to be cast over them. Some people try to wing it on their own. Big mistake. Buying a house is likely the largest investment most Canadian will make during their lives, it's very important to have a good lawyer holding their hands through the process. A lawyer who specializes in real estate can keep the unwary from making a ghastly mistake.

Most mortgages have two time periods attached to them. The "term" is the length of time for which the mortgage operates--usually anywhere from six months up to ten years. When the term expires, the amount owing can be paid off in full or a new mortgage drawn up to cover the balance.

The second time-related issue is called "amortization." This is the total period over which mortgage repayments are stretched out--amortization periods are usually 15, 20, or 25 years. The longer the amortization the lower the monthly payments will be. However, if the amortization is long the total amount of interest paid over the life of the mortgage will be higher.

Mortgages also come closed, open, or variable--hang in there; knowing the ins and outs of mortgages can save thousands of dollars. A closed mortgage means the interest rate is fixed for the length of the term. Closed mortgages are good to have if interest rates are rising; even though the cost of borrowing money may go up, your mortgage payments remain the same over its term.

An open mortgage usually has a slightly higher interest rate than a closed one, but it has the big advantage of allowing lump sums to be paid off the principal at any time. Some mortgages are partly open; these may allow borrowers to pay something off the principal once a year on the anniversary date.

Variable mortgages don't have fixed interest rates. This is a good thing to have when interest rates are going down because the interest on the mortgage will decline. Of course, the opposite is also true; if interest rates go up so does the rate on the mortgage. However, most variable mortgages have a "lock-in" option; this allows the borrower to change to a fixed rate that will stay the same until the term expires.

The monthly payments are split into two parts. The first part goes to pay the interest--that's the fee for using the lender's money. The second part of the monthly payment goes towards the principal--that's what is left of the $180,000 loan. At the start of the mortgage's life almost every penny of the monthly payment goes to interest, and almost nothing is knocked off the principal. Later, less money goes to interest and more towards principal. Each month's payment reduces the principal a little bit, therefore less interest is owed the next month. Because less interest is owed, more of the payment can be used to reduce the principal.

What we've covered so far falls under the heading of conventional mortgages. There are others, which the lenders high-ratio mortgages. A conventional mortgage can only be advanced to cover 75 percent of the purchase price. Above that, the borrower needs a second or even third mortgage. These are riskier so the interest rate on them is higher. Also, the borrower must buy insurance to cover the possibility of a default. These non-conventional mortgages can be expensive to feed. Someone planning on taking out a third mortgage probably ought to be thinking about buying a less expensive property instead.

SHORTCUTS

The aim of most home buyers is to pay off their mortgage in full. When the happy day arrives, many people hold a "mortgage burning party," at which the document is out to the torch. There are several ways of getting to mortgage-burning-day faster.

Making weekly payments instead of monthly speeds up the process. So does making slightly larger payments each year as income rises. The shorter the amortization the faster the mortgage is paid off. Having an open mortgage means being able to make extra payments off the principal--even $50 can make a big difference over the life of the mortgage.

Time for some real numbers. Let's say we want to borrow $150,000 at 5.5%. An open mortgage with a one year term and amortized over 20 years will mean monthly payments of $1,031. In 20 years, the mortgage will be paid off and the whole thing will have cost $150,000 plus interest charges of $97,373, for a total of $247,373. Ouch.

But, if you pay just $50 a month extra off the principal you save more than $8,800 in interest over the 20 years. Cut the amortization to 15 years and monthly payments go up to $1,225, but the total interest paid is now $65,809.

THE BACKWARDS MORTGAGE

Retired people on fixed pension incomes often can use some extra money. Mostly, they have paid off the mortgages so they can take advantage of the value of their homes with something called a reverse mortgage, These are complicated deals that give the homeowner a regular income in exchange for part title to their property. When the homeowner dies, the property is sold and the proceeds are used to pay back what was paid out, plus some extra. These reverse mortgages are not always as good as they seem; expert advice is highly recommended.

FACT FILE

One of the rules-of-thumb that banks and other lenders use in approving mortgages involves something called PITH; this stands for Principal Interest, Taxes, and Heating, and the cost of those added together should be less than 30 percent of the borrower's gross income.

WORD WATCH

The word "mortgage" comes from the French language of the Middle Ages, and means literally a "dead pledge."

A 17th century legal expert, Sir Edward Coke, is given credit for explaining the reason for choosing the morbid word. He wrote that if land is pledged to secure a loan and the money not paid back "then the Land which is put in pledge upon condition for the payment of the money, is taken from him for ever, and so dead to him ... And if he doth pay the money, then the pledge is dead ..."

Website

Canadian Mortgages--http://www.mortgagemade-easy.com/