Mortgage Basics
Perhaps even more stressful than finding
the perfect home is finding the perfect mortgage. It may
seem like every bank, broker and builder is selling a
different product at a different rate.
The first decision most people make is to
choose between a mortgage with a fixed rate or a variable
rate. The difference is pretty straightforward: with a fixed
rate the interest rate remains fixed, or locked in, and with
a variable rate the interest rate will fluctuate throughout
the term of your mortgage, according to the prevailing
market rates. Generally a variable rate mortgage in a time
of low interest rates will mean that less money is paid out
over the course of the term. However, there is always the
worry of rates rising.
For the faint of heart some variable rate
mortgages offer capped or protected rates, meaning a maximum
rate of interest is set for the buyer. Even if rates rise,
they will never exceed the set point. Finding your own
comfort level is important when faced with the prospect of
fluctuating rates. For some the potential savings are not
worth the worry over rising rates.
The length of time in which the
conditions of your mortgage will stay the same, known as the
term, will vary depending on what type of mortgage you
choose. A short-term mortgage is usually for under three
years with more than that considered long-term. There is
generally a higher interest rate attached to long-term
mortgages, a trade-off for having several years at a stable
rate, which may be a plus when interest rates are rising. If
interest rates are falling a short-term mortgage may be the
better option - allowing you to lock in at an interest rate
when you think rates won't continue to fall.
No matter the interest rate, how you pay
down your mortgage will also influence what you pay in
total. Paying weekly or biweekly, instead or monthly, will
lower the total amount of interest paid and save you money.
Choosing a shorter amortization period - the number of years
it takes to pay off the loan - will also save you interest
payments.
Though it sounds obvious, it's best to
customize your mortgage according to your needs, and to
consider features beyond the interest rate when choosing a
mortgage. "Over time more consumers have become more
sophisticated and more knowledgeable, and open to new
options," says Stergiadis.
For example, if you think you will not
stay at your new home long then you may want to look for a
mortgage with portability. You will then be able to move
your mortgage with you at the same terms. Another option, if
you think that you may be moving in the foreseeable future,
is to consider an open mortgage. While they generally have a
higher interest rate, they give you the flexibility to make
lump sum payments before the end of the term without
penalty.
If downsizing is on your horizon, you may
want to look for a mortgage with assumability. An assumable
mortgage is one that can be picked up at the same terms by a
prospective buyer. Or, you may want to consider a mortgage
that allows you to use the equity in your home as a line of
credit. While the mortgage must still be paid off by the end
of the amortization period it leaves credit available to you
as you pay down the mortgage.
As you can see, you have many different
mortgage options. No matter what type of mortgage you
choose, just make sure that the dollars and cents make sense
for you.
Mortgage
Glossary
Amortization Period: The number of
years it takes the borrower to pay off their loan in regular
payments of principal and interest.
Assumable Mortgage: New owners of
a property can take over the existing mortgage of that
property, at the same terms.
Down Payment: The difference
between the purchase price and the mortgage amount as a
result of money paid.
Fixed Rate: The interest rate
remains fixed, or locked in, for the term of the mortgage.
Mortgagee: The lender who holds
the mortgage.
Prepayment: Paying extra payments
or a lump sum to pay down your mortgage faster.
Prepayment Penalty: Money charged
for extra payments or lump sum payments on the mortgage. A
prepayment clause in your mortgage agreement allows you to
make extra payments without incurring a penalty.
Portable Mortgage: A mortgage that
allows you to transfer the amount and terms over to a new
property without cost or penalty.
Variable Rate Mortgage: The
interest rate may vary during the term of the mortgage,
according to the prevailing market rates. Some variable rate
mortgages offer capped or protected rates, meaning a maximum
rate of interest is set for the buyer.
Paying the least amount of interest
possible on your mortgage means that your new home or condo
costs less in the long run - no matter what type of mortgage
you decide on. Here's how to pay less interest:
Increase your down payment. The larger
the down payment you put down the smaller your mortgage,
which means less interest.
Frequent payments. Paying down your
mortgage in a weekly or biweekly payment schedule will mean
you pay less interest than if you made monthly mortgage
payments.
Shorter amortization period. The longer
your repayment period the more you will be paying in
interest. You can save money by paying your mortgage off in
less time. |