Types, rates, terms, variable, fixed, amortization, short term, long term, is your head spinning yet? Unless you are one of those lucky few that can pay cash upfront for a house then you have some homework to do. Choosing the right mortgage for your purchase is very important. There are so many different types and combinations that making an educated decision is a must. The right mortgage can help you pay your mortgage off as fast as financially possible with the least amount of interest. The right mortgage could save you thousands to tens of thousands in interest. That’s a big deal.
Consulting several mortgage brokers, both private and bank, can give you a better understanding of what your options are because each different professional can add to your understanding based on their individual knowledge and their own perspective.
Here is a breakdown of the basics that you should review before diving in head first.
A closed mortgage means that the monthly or bi-weekly payments remain the same for the duration of the loan period. This is a budget friendly option but it comes with a penalty if you decide to terminate the mortgage before the term is up. Terms can be six months, one, three, five, seven, ten, fifteen and twenty years. With the five-year term generally being the most popular. Interest rates tend to rise with the length of the term.
An open mortgage allows you to pay extra off your mortgage early which is a good option to have to reduce the amount of interest you’re paying in the long run but there is usually a yearly cap.
A variable rate mortgage can be a gamble. If the interest rates rise then so do your payments. Conversely, if the mortgage rates drop then you payments do as well. It depends on how comfortable you are with the uncertainty of the situation.
A fixed rate mortgage locks in your payments at a set amount. It prevents you from paying less if the mortgage rates lower but it also protects you from paying more if the mortgage rates go up.
A short term mortgage is for two years or less and a long term mortgage is 3 years or more. Some people choose short term mortgages when they think that the mortgage rates will go down at the end of the term and long term mortgages make sense to take advantage of when the rates are already low.
A conventional mortgage is a loan of no more than 80% of the appraised value or purchase price of the property, whichever is less. The remainder of the cost must be paid by the purchaser which is called the down payment.
A high ratio mortgage is used for loans that exceed conventional mortgage lending guidelines and are required by law to be insured against default by the Canada Mortgage and Housing Corporation (CHMC)or Genworth Financial Canada. The purchase is responsible for paying the premium which is base don the mortgage amount.
Make sense? No, it doesn’t to me either. And this is just the tip of the iceberg of the jargon that you will need to process. So make sure to interview several mortgage professionals and choose one that you trust to guide you to make the best decision for you.