Understanding Mortgage Options
Understanding Mortgage Options
How do you choose a mortgage that's right for you? If you're getting a mortgage for the first time you may have a few questions.
What's the difference between conventional and high-ratio mortgages?
A conventional mortgage is a mortgage loan up to a maximum of 80% of the lending value of the property. The property buyer has to make a down payment of at least 20% of the purchase price or market value of the home. If your down payment is less than 20 per cent of the purchase price, you will probably need a high-ratio mortgage. A high-ratio mortgage is a mortgage loan which is higher than 80% of the lending value of the property (up to a maximum of 95%). High-ratio mortgages typically have to be insured against payment default.
What are fixed, variable or adjustable interest rates?
When choosing a mortgage, you have to decide whether you want the interest rate to be fixed, variable or adjustable. A fixed rate is locked-in for the entire term of the mortgage. With a variable rate, the payments remain the same each month, but the interest rate fluctuates based on market conditions. For adjustable rate mortgages, both the interest rate and the mortgage payments vary based on market conditions.
Do you want an open or closed mortgage?
With a closed mortgage, you pay the same amount each month for the entire term of the mortgage. There is some flexibility to repay principal through lump sum payments. Closed mortgages can be a good idea if you want a fixed payment schedule, and you don't plan on moving or refinancing before the end of the term. An open mortgage allows you to make a lump sum payment at any time. This type of mortgage can be paid off prior to maturity without penalty. An open mortgage can be a good choice if you're planning to sell your home in the near future, or if you want the flexibility to make large lump sum payments. An open mortgage generally carries a higher interest rate than a closed one.
What about term, amortization and payment schedules?
The term is the length of time (typically from six months to 10 years) that the interest rate and other conditions of your mortgage will be in effect. Amortization is the period of time (such as 25 or 30 years) over which your entire mortgage will be repaid. Finally, the payment schedule sets out how frequently you will make payments on your mortgage - usually either monthly, biweekly or weekly. Accelerated payments are another option. These are available for weekly and bi-weekly payment schedules and are generally equivalent to one extra monthly payment per year. With accelerated payments the home owner is able to pay off his/her mortgage faster while decreasing the overall interest cost.
Fixed Rate vs. Variable Rate Mortgages
Fixed Rate Mortgage:
Your interest rate will not change throughout the entire term of your mortgage.
Variable Rate Mortgage:
Your interest rate may fluctuate from time to time.
Conventional Mortgages vs. High Ratio Mortgages
If your down payment is greater than 20% of the purchase price or valuation of the property, you may qualify for a conventional mortgage. That means you are not required to pay for mortgage default insurance.
High Ratio Mortgage:
If your down payment is less than 20% of the purchase price or valuation of the property, your mortgage must be insured against payment default by a mortgage insurer, such as the Canada Mortgage and Housing Corporation or Genworth Canada.
Open vs. Closed Mortgages
An open mortgage allows you to pay any amount toward your mortgage at any time, without having to pay any prepayment compensation for doing so.
A closed mortgage requires you to make set payments at set times and pay prepayment compensation if you want to pay more, renegotiate, refinance or transfer your mortgage before the end of your term (subject to any prepayment privileges you may have).
Term of Mortgage and Mortgage Amortization Period
Term of Mortgage:
Mortgages are available in a variety of terms. The term is the length of your current mortgage agreement. Typically, terms range from 6 months to 10 years. When a term expires, the balance you owe on your mortgage can be repaid, or a renewal of the mortgage may be offered by the bank at the then current interest rates.
Mortgage Amortization Period:
Amortization period is the length of time it takes to pay your mortgage, assuming the same interest rate and payment amount. A common amortization period is 25 years but there are other alternatives. Shortening your amortization period can help you reduce your overall cost of borrowing but it will also increase your monthly payments.
When it comes to deciding on a type of mortgage, there is much to consider. Talk to a mortgage professional to find out which option is right for you, and be sure to evaluate the impact of an increasing interest rate on your monthly payment.
You don't have to be a financial expert to make an informed purchase decision. What you need is the right tools, resources and team on your side CottageClub is committed to ensuring the best financial information and options are available to you. Come by for a visit!
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